An industry that boomed in Andhra Pradesh through the 1990s sees its survival at stake in the state.
The 1990s, which saw a proliferation of self-help groups (SHGs) and microfinance institutions (MFIs) in Andhra Pradesh, were the transforming years for rural women in the state.
Financial inclusion became a byword for the state and the stories of lives being changed by affordable credit at doorsteps of rural households were a common thing.
However, in the very next decade, the scenario completely changed. The mecca of MFIs was now the subject of reports of hapless women driven to suicide by over-indebtedness.
“We are completely at the end of the road. The survival of the MFI sector is at stake,” Udaia Kumar, managing director of Share Microfin, one of the first MFIs to come up in the state, said.
“The borrowers are threatening to file complaints against recovery agents and driving them away,” V Prabhudas, chairman and managing director of Cresa Financial Services, one of the new entrants in the sector, echoed.
What happened? Why are MFIs choking in the very state they flourished?
“Today’s crisis is due to the failure of MFIs to adhere to the basic regulations of the Reserve Bank of India (RBI),” R Subrahmanyam, Andhra Pradesh principal secretary for rural development, said.
According to a report submitted by the state government to the Malegam Committee set up by RBI to the study the issues and concerns of the sector, MFI activities in the state could be divided into three phases.
In the first phase, they started their operations as non-government organisations, forming groups, providing micro credit and other services to the poor. At this stage, they had limited resources and geographical spread.
In the second, MFIs converted themselves into Section 25 companies to overcome these limitations and started making profits and spreading their activities.
In the third, these companies found it necessary to make profits to grow and garner funds. They marketed microfinance as a good business tool among private equity funds. Now, “the poor have become an object of profit, a business opportunity”.
Subsequently, the report said, MFIs started pumping credit by short-cutting the process of group formation. The modus operandi was to increase the credit flow by setting stiff targets for agents and identifying households willing to take loan. Loans were given without any verification of credit history, purpose of loan or the ability to pay back.
Once a willing household was identified, a make-shift group was formed with a few others desirous of taking loan. Individual promissory notes were obtained, in violation of RBI guidelines. The recovery of loans was done by MFI agents on a weekly basis, through coercive methods, irrespective of a group’s ability to repay.
If borrowers were not able to pay back, the agents encouraged them to take fresh loans to repay earlier loans. A debt spiral was thereby created. MFIs showed 100 per cent recovery to banks, concealing the fact that most of the recovery had been done through fresh loans.
“The organisation supposed to bring them (the poor) out of poverty not only takes away the surplus, but also their honour... even their life,” the report points out.
Subrahmanyam says 51 cases of suicides, allegedly linked to coercive methods of MFIs to recover loans, were being investigated.
The incidents of suicides have caused a furore in the state and leaders of all political parties have taken up cudgels against MFIs. They, including the members of the ruling Congress party, have asked the poor not to pay back their loans.
The state government has enacted AP MFI (Regulation of Money Lending) legislation. Under this, use of coercion for recovery of loans has been made an offence punishable with imprisonment for up to 3 years or fine of up to Rs 1 lakh or both.
The legislation and the politicians’ support have emboldened borrowers to default in repayment of loans. Now, the recovery agents are at the receiving end.
Meanwhile, microfinancing emerged as a mega business. The founders of many MFIs made substantial money. Take, for instance, SKS Microfinance, the only listed MFI in the country. “I made tonnes of money,” SKS Founder Vikram Akula said after the MFI successfully completed its initial public offer (IPO). According to him, his pre-IPO gain after tax stood at $8.5 million. Besides, he owns 3.4 per cent of the company as stock options, which, at that time, was worth about $8 million — for someone who started his NGO career in 1990 on a salary of Rs 1,000.
Akula started SKS as a poverty-alleviation initiative and turned it into a profit-making business that raised Rs 1,650 crore through IPO in August 2010.
Like SKS, Share Microfin also planned to come out with an IPO. It even shifted to a swanky office in the upmarket Begumpet area of the city as a run-up to the IPO. But it had to be put on hold after MFIs plunged into crisis.
“The repayment rates have fallen from 99 per cent to around 15 per cent in the state and the line of credit from banks has dried completely. There have been no fresh disbursal in Andhra and only 30-40 per cent of the collections have been disbursed in other states. The rest of the collections would be used to honour repayment obligations to banks. Low institutional-level funding and inappropriate bureaucratic and political interventions in Andhra have brought the sector to the end of the road,” Share Microfin’s Udaia Kumar says.
Kumar acknowledges the need for specific regulations on the sector, but says the “order in which the ordinance was promulgated without any consultation with MFIs and banks has taken all stakeholders by surprise”.
But why had Andhra Pradesh been a fertile ground for MFIs? There are 79 MFIs operating in rural and 63 in urban areas of the state. The number of borrowers and the total outstanding loan stand at 6.5 million and Rs 7,238 crore, respectively.
Kumar says he started operations in the state because he belonged to it. “We saw there was demand for these services and it took two years for us to design the delivery mechanism.”
“The growth rate was 100 per cent in the initial years, which should not have happened. With this kind of success rate, more MFIs came in. This led to multiple lending and over-indebtedness,” he says.
Subrahmanyam, who was instrumental in the state government bringing out the MFI ordinance, points out that Andhra became a haven for MFIs because, with a million SHGs, “it is like a ready cooked food”.
Nobody is undermining the contribution of MFIs towards socio-economic development. However, everyone connected with the sector now feels that there is a need to put the house in order.
As things now stand, the Microfinance Institutions Network has filed a writ petition against the provisions of the Andhra Pradesh legislation in the state high court.
The Malegam Committee report recommended a margin cap of 10 per cent on large MFIs (with more than Rs 100 crore outstanding), besides putting an overall cap on interest rate at 24 per cent.
Such a directive from the regulator, according to Kumar, means MFIs will have to restrict themselves from operating in remote areas. This will hinder the financial inclusion agenda. There will also be no cushion for exigencies and the growth of MFIs would be minimal.
“This is time all those involved in policy making for microfinance woke up and prevented the pre-mature death of an upcoming industry,” Kumar said.
