Amid a clampdown on lending practices, microfinance institutions (MFIs) were seeking emergency funding from banks as defaults jumped, an industry group said. Shares of SKS Microfinance fell by a record.
The lenders were seeking Rs 1,000 crore ($221 million) to set up an emergency “liquidity fund,” Vijay Mahajan, head of the Microfinance Institutions Network group (MFIN), said. Loan recovery in Andhra Pradesh, the biggest market for MFIs, had come to a standstill, he added.
MFIs—which typically offer loans, starting from $100 to the poorest—came under pressure after the state capped interest rates they could charge and barred them from coercing borrowers to repay debt to prevent suicides. SKS, the lender backed by George Soros, fell 11 per cent to the lowest level in Mumbai trading, since its August trading debut.
“There have been negative views about MFIs in the past few weeks” because of Andhra Pradesh’s tightened norms, said D K Aggarwal, managing director and chairman of SMC Wealth Management Services. “As long as MFIs have no strong regulation, confidence in them will remain low.”
Microfinance, which focuses on loans in poor areas largely shut from traditional banking services, gained prominence globally when Muhammad Yunus won the Nobel Peace Prize in 2006 for his role in founding Bangladesh’s Grameen Bank. India — where more than 600 million people live on less than $1.50 a day — is the world’s largest market for such loans.
Debt pileup
Yet, in recent months, MFIs have been criticised by law-makers for offering loans without adequate documentation and allowing borrowers to pileup debt. India doesn’t have a nationwide system for tracking borrowers’ credit histories, making it hard for the lenders to check whether clients had multiple loans.
In mid-October, Andhra Pradesh, which accounts for about 27 per cent of SKS’s loans, passed an order saying MFIs can’t charge interest exceeding the principal on loans. Also they were barred from using coercive measures to force borrowers to repay debt.
In an October 23 statement, Hyderabad-based SKS said its interest rates and lending practices already met those guidelines. Still, field operations, including holding village meetings, had been disrupted in Andhra Pradesh following the ordinance, the lender said on November 9. The company was seeking changes to the more “onerous aspects” of the new rules, it had said.
SKS had also reduced interest rates to 24.55 per cent in Andhra Pradesh, and planned to lower it to 24 per cent in that state and in other markets.
“The ordinance and its implementation will have material impact on the company’s operations” in the state, SKS said in its November 9 statement to the exchange.
Stock performance
Shares of SKS, which were sold for Rs 985 apiece in its initial public offering, have dropped 19 per cent since its trading debut in August, compared to a 9.4 per cent advance in the Sensex. Spokesman Atul Takle declined to comment.
MFIs are now in talks with the Small Industries Development Bank of India and ICICI to set the emergency fund, Mahajan said. “It will particularly help smaller” lenders, he said. “They will be saved as they don’t need big medicines.”
