Andhra offers to help banks recover micro credit amount

..but only if MFIs are kept out from recovery operations

With over Rs 500 crore credit lent by banks to micro finance operations in the state ending up as NPAs due to the recent row over alleged excesses committed by micro finance institutions (MFIs), the Andhra Pradesh government has offered them assistance in getting back their money if they directly involve themselves in the recovery keeping out the MFIs from the operation.

ICICI Bank is the biggest financier to the micro finance sector in the state involving as much as Rs 400 crore to Rs 500 crore followed by Small Industries Development Bank of India (Sidbi) which has lent approximately Rs 200 crore, according to the information available with the state government.

HDFC has also lent around Rs 50 crore to Rs 60 crore. However, there is no clear estimation of the volume of private money involved in the micro credit business in the state.

Highly placed sources told Business Standard that the government had already informed the banks of its intent to help them out of the mess.

"The government has offered assistance to the banks through its district agencies in recovering the loan amount from borrowers. However, keeping in view the negative image of some of the MFIs in some districts, the government told them to directly involve themselves in the recovery process. We have also suggested them to convert bigger amounts into term loans for easy repayment by the poor borrowers," a senior government official connected with the micro credit issue said.

It may be recalled that the loan recovery in micro finance operations in districts like Krishna and Guntur came to a halt after the borrowers complained of high rate of interest and harassment resulting in the intervention of respective district administrations.

A couple of suicides on account of alleged harassment by MFIs had forced the district administrations to close down the offices of certain micro finance operators.

The allegations included the collection of high rate of interest (24%) and forced recoveries. A liberal offer of loans by MFIs also appeared to have resulted in multiple loans to a single borrower irrespective of the client's re-paying capacity.

Following the governmental intervention, MFIs have agreed to reduce the rate of interest to 15 per cent. In spite of this move, the banks have been facing the recovery problem as the district authorities, borrowers and MFIs were at loggerhead ever since the controversy had erupted.

The micro finance operations are largely limited to the coastal districts of Krishna, Guntur, West Godavari, Prakasham and Nellore with the main focus being on urban slums.

But, according to officials in the finance department, the government's advice to the banks to keep out MFIs and undertake recovery operations directly met with a cold response.

"When we conveyed the government's offer of help, representatives of the ICICI Bank refused to agree to the proposal and said the bank would work out its own strategies in recovery and operate through Sadhana and Share (micro finance institutions) through which it financed the micro credit operations in these districts," a finance department official pointed out. When contacted, ICICI Bank officials said they were yet to take a final decision on the government's offer.

Besides the private MFIs, the state government's rural development department is actively engaged in micro credit operations through the World Bank and government-aided self help group (SHG) schemes in the state.