Just a few years ago, Microfinance institutions were the lords of poverty, imperiously ruling over a new goldmine unearthed in corporate India, this one lying at the bottom of the pyramid. SKS Microfinance head Vikram Akula, posterboy of the industry claimed he wanted to be the ‘google’ of microfinance, using his company’s branding and reach to sell all kinds of goods through its pipeline to the poor. Despite warnings from industry veterans like SEWA founder Ela Bhatt and David Gibbons of Cashpor that companies like SKS and its peers were merely serving relatively well-heeled segments of the poor and creating ‘debt treadmills’ where one loan would be taken out to finance another, no one listened.
TANKING INDUSTRY
Today, it is no surprise then that the Andhra Pradesh Microfinance Institutions Act has created an industry landscape that is strewn with the wreckage of dead or dying institutions. SKS reported a net loss of Rs 384 crore for the second quarter of the present financial year, against a profit of Rs 80 crore in the same period last year. In the first half of 2010-11 fiscal (April-September) Spandana reported a profit of Rs 220 crore. However, by the end of the year it translated into a loss of Rs 9 crore. Essentially, the Rs 30,000 crore MFI industry has now been squeezed to almost half of its size. In the first half of FY11, MFIs in AP disbursed Rs 5,000 crore, which plummeted to a paltry Rs 8.5 crore in the second half. Recovery dropped from 100 per cent to less than 5 per cent in the last one year. It is almost as if an atomic bomb was dropped on the sector.
Many, however, feel that the Act has done its job. “After evaluating the experience after one year of the Act, the primary objective of protecting the poor from exploitation has been comprehensively met. The exploitative practices have vanished,” says Reddy Subramaniam, principal secretary (rural development), AP. Suicide cases due to MFI lending have reduced to almost nil compared to the hundreds in the mid-late 2000s—with 203 MFI-linked cases reported just between May 2010 and February 2011, according to information from Society for Elimination of Rural Poverty, Hyderabad. Yet, could this relative calm conceal a storm about to hit the industry?
TOXIC CLOUDS lOOM
While microfinance tanks, banks have been heavily investing in MFIs’ portfolios through securitisation deals. It is estimated, that MFIs issued securitised papers worth Rs 4,000 crore to banks. Through securitisation, a bank buys the portfolio of MFI in return for the right to collect their loans. The process is mutually beneficial, as in one hand it helps MFIs to get money to lend more, while it help banks to meet their priority sector lending targets. MFIs bundle up microloans and structure debt papers around it. Recently, for the first time private wealth managers, Avendus Capital has bought a major chunk of the Rs 10.8 crore loan portfolio of Tiruchi-based Grama Vidiyal Micro Finance. This could make things worse for a banking sector already reeling from bad loans to MFIs.
A HISTORY OF IMPROPRIETY
The journey of MFIs from charitable to corporate entities is also under the scanner. Unlike its foreign counterpart like Bancasol of Bolivia and Compartamos of Mexico, Indian cooperative societies are not allowed to take equity stake in for profit companies. Yet, some did, using subterfuge—undetected at the time, but in hindsight clearly a harbinger of things to come. MS Sriram, an adjunct professor at the Indian Institute of Management, Ahmedabad, in a study on the sector points out that at least three major MFIs in Andhra Pradesh used grant funding for its not-for-profit organisation to capitalise the for-profit operations of its NBFC.
Here’s how it would work according to Sriram: The NGOs would give the grants to individual borrowers. (The grant would often come from surplus created by the operations of NGO.). The money would go to Mutual Benefit Trust (MBT), collectively owned by the borrowers. The MBT's would invest in the shares of NBFCs. The NBFC, in turn would buy the assets and liabilities of the NGO. Thus, the NBFC would acquire the portfolio of the NGO. Later, the promoters of MFI would often acquire the MBT share holding.
Interestingly, none of the major MFIs, except SKS, have MBTs as shareholders. “In case of two MFIs, data indicates that the ownership of shares moved from the MBTs to eventually the promoters, though the route is not very clear. In case of SKS the shares were with the MBTs,” says Sriram. Alok Prasad, the Chief Executive Officer of MFIN (Microfinance Institutions Network ), admitted that there have been instances of misuse of MBTs. In an email reply, MFIs Asmita and Share, said that, “we would like to confirm that there is no shareholding by any Mutually Benefit Trust (MBT) in the Company.”
BLAME GAME
While the industry slides into oblivion, the main stakeholders continue to take pot shots at each other. MFIs now contend that the state is promoting a poor credit culture, while the state government says that MFIs are themselves responsible for the present crisis. “What the state government has done is completely wrong. Over 50 lakh households in Andhra Pradesh are now defaulters. A decade of credit culture has been spoiled,” says Padmaja Reddy, founder, Spandana. “The amount is stuck due to questionable credit delivery practices. One cannot lend to people beyond their repaying capacity, or to people without any credit history, and expect the money to be recovered. It is the greed to expand business which led the MFIs to follow questionable methods and resorting to high risk lending,” counters Subramnium.
While MFIs say the aim of the government behind the Legislation was to promote its own self help group lending, government blames the MFIs for derailing and copying the SHG movement for client acquisition. “The SHGs were not able to perform well. Banks were not supporting them. They (government ) have taken it egoistically,” says Reddy. Not so, says Subramaniam. “The real growth of MFI's picked up only after the SHG movement gathered steam. They pushed credit using questionable financial practices to the very same SHGs which are already linked with the banks.” While this mud-slinging is going on, the government recently created the Sthree Nidhi Cooperative (SNC) in partnership with the Federations of the 10 lakh SHGs in order to fill the gaps left by MFIs. This organisation plans to lend Rs 1,000 cr this year, and scale it up to Rs 4,000 crore.
THE SLOG AHEAD
To give you a sense of the financial attractiveness of the industry, consider these numbers: For three years until 2010, the total amount of PE investment in the sector was close to Rs 2,500 crore, according to Shashi Shrivastava, Senior Vice President, Grameen Capital, an MFI advisory firm. In contrast, in the last year, the PE investment was just Rs 280 crore, of which Rs 135 crore came for West Bengal based-Bandhan. Last quarter also saw the exit of Soros from SKS, according to information at BSE. For non-listed MFI, the exit routes are further clogged. In a May 2011, report by Legatum Ventures, a private investment firm and a shareholder of Share, said.“ "Legatum is, of course, concerned that it may lose 100 per cent of its investment in Share in a very short time."
Still, thanks to restructuring of their debt, five MFIs—Asmitha Microfin, Future Financial Services, Share Microfin, Spandana Sphoorthy Financial and Trident Microfin¯ are now looking to expand their non Andhra Pradesh portfolio to try and recover losses. However, caught between mounting debt and depleting cash flows, small and mid-sized MFIs which had mushroomed in the last decade are now in the brink of collapse. And for millions of micro borrowers, it might be the beginning of a whole new struggle for credit.
