The crisis faced by the microfinance sector in Andhra Pradesh (AP) “is an eye opener for all the stakeholders,” according to SKS Microfinance chief financial officer, S Dilli Raj.
Though recovery and lending operations of MFIs have by and large come to a halt in the state due to regulatory issues, Raj said the AP crisis had brought certain benefits to the industry.
The first and foremost benefit, according to him, was that it had established the validity of the MFIs operating model with necessary data backup. Besides, it has paved the way for ushering in a comprehensive regulatory framework. At the same time, Raj told Business Standard, it has proved there is really no substitute for microfinance to fuel credit to rural folks in a collateral-free format at their doorsteps.
Most of the MFIs in the state plunged into losses following the enactment of The Andhra Pradesh Microfinance Institutions (Regulation of Money Lending) Act in 2010.
SKS, the largest and the only listed MFI in the country, was the worst affected by the legislation, which is mainly aimed at curbing what was termed as questionable lending and recovery practices.
Nevertheless, Raj said the AP government had raised “three genuine concerns”. The first was that a section of the people felt that MFIs were charging usurious interest rates. The second was about some of the customers being overleveraged. And, finally about questionable recovery practices. He said the Reserve Bank of India had subsequently stepped in and addressed all these concerns. The RBI had fixed a cap of 26 per cent on interest rate. Similarly, it imposed a cap of Rs 50,000 on the aggregate borrowings of individuals. The banking regulator also stipulated that no more than two MFIs can lend to the same customer.
With regard to questionable recovery practices, the RBI had stipulated that all customer connectivity should happen at a public place. The representatives of the MFIs have the right to visit the work place or the house of the borrower only if she defaulted on payment of two consecutive instalments. Consequently, Raj said there would not be any repetition of the AP-like crisis in the future. “Today, there is a regulatory framework, which defines do’s and don’ts. There are credit bureaus that have all the credit data and MFI associations, which has come out with a code of conduct. Besides, the sector is now left with very few serious players, less than 45 compared to over 600 earlier,” he pointed out.
On the flip side, he said, 9.2 million rural borrowers in AP were now categorised as defaulters in the books of two credit bureaus - Equifax and High Mark. “This state has been a pioneer in financial inclusion but today earns the dubious distinction of being the largest state with the largest number of rural defaulters.”
In effect, there was disruption of working capital cycle for millions of micro enterprises in AP. Someone has to infuse liquidity and bring them back to shape. SKS had disbursed Rs 5,035 crore in FY11. In FY 12, that amount came down to Rs 8.5 crore. Nobody had substituted that Rs 5,000 crore of demand. So, people have gone back to moneylenders. “The real point to be learned by all the stakeholders here is that there is no alternative to microfinance,” Raj added.
