MFIs in Andhra Pradesh are paying for the sins of their past. Market for new loans has dried up, banks have turned off their spigots while the AP government is content to sit back and watch.
It has been eleven months since the Andhra Pradesh government issued an ordinance—later converted into the Andhra Pradesh Micro-Finance Institutions (Regulation of Money Lending) Act—which, the microfinance industry hoped, would be the magic remedy that fixed the industry post its implosion.
Those hopes have turned sour. The grim reality is that, micro finance institutions (MFIs) have been struggling in Andhra Pradesh. Their lending has come to a halt, repayment has gone down drastically and banks, their major source of borrowing, have squeezed funds. Moreover, all evidence points to the conclusion that the crisis in the sector in Andhra is unlikely to be resolved in the near future with the state government and the MFIs failing to find middle ground.
This has serious consequences for both Andhra as well as the industry, as the state accounts for 25 per cent of the loan portfolio of the Rs 30,000 crore MFI industry. There are about 8 million borrowers in the state.
| MFI FACT SHEET |
| * Size of MFI industry in India: Approximately Rs 30,000 crore |
| * Size of AP market: Over Rs 10,000 crore |
| * MFIs portfolio in AP: Around Rs 6,000 crore. |
| * Outstanding loans in AP by MFIs: About Rs 6,000 crore. |
| * Banks exposure to MFIs in AP: Rs 5,000 crore |
| * Banks exposure to MFI industry: Rs 18,000 crore |
| * Number of MFI borrowers in AP: About 8 million |
| * New MFI borrowers in AP (Oct 2010-present): None |
| * Default rate before Act: About 2% |
| * Default rate post Act: 85- 90%. |
| * No. of job-cuts in AP if MFIs shut shop: 25,000 (rural youth, not highly qualified) |
| * Write-offs (from Oct-present):Rs 2,500-3,000 crore |
| Source: MFIN |
A TROUBLED PAST
This isn’t the first time that MFIs have been battered in Andhra. They took their first big hit in 2006, in Krishna district, because the many unsavoury practices that were going on at the time such as multiple lending, high interest rates and forcible recovery eventually came to light. “Everybody was aiming at increasing market share. It was about too many institutions in the same area targeting same clients and flooding them with choices,” says Share Microfin founder Udaia Kumar, one of the oldest MFIs in India. “That crisis had to happen. But everybody worked together and resolved it,” he adds.
Major MFIs in Andhra then came under Sa-Dhan, a national association of community development finance institutions, and decided to follow a code of conduct. Their business grew at a scorching pace, clocking growth rates of 150-180 per cent. SKS, set up in 1998 with a purpose “to eradicate poverty”, became the first MFI to hit the market with an IPO.
Then came some bad news. In 2010, the Society for Elimination of Rural Poverty (Serp), set up by the state government, listed 54 suicide cases alleged to have been committed by borrowers due to coercive recovery practices of MFIs. Suddenly, the sector was caught on the wrong foot all over again. This time, there seems to be no solution in sight. “In 2006, when MFIs were indulging in unfair practices and the government wanted to come out with a regulation, they promised to play by the book,” says Serp chief executive officer B Rajsekhar. “They said they would follow a code of conduct, which they did not honour and we had to come out with a regulation this time,” he adds.
BANKING ON FUNDS
The chief culprits for this recent stalemate, according to MS Sriram, former IIM-A professor and an independent researcher based in Bangalore, is the banking industry. “The deafening silence of the banks in this entire episode is somewhat startling. Sidbi, which was the most aggressive lender and also on the boards of several MFIs, has not said anything in public, nor is seen to be doing anything,” says Sriram. “The commercial banks, which have a huge stake in terms of the portfolio have taken the passive route of CDR and are knocking the doors of the RBI. I wonder if the banks together have discussed this with the state government. They are the most credible institutions to take up the issue and they have not taken it up,” he adds.
According to a banker, the factor that fuelled the stratospheric rise of MFIs was the fortuitous priority sector lending clause issued by the RBI. Under this clause, banks have to lend 40 per cent of their total loan portfolio and of the total 40 per cent, 45 per cent should go to agriculture. If unable to meet this target, banks were supposed to stash this cash in Nabard bonds, which fetched a paltry 3-4 per cent interest. Private sector banks were finding it difficult to meet their priority sector lending target and suddenly MFIs were a godsend since they delivered 12-13 per cent interest. When the RBI said that MFI loans could be treated as agriculture loans, both banks and MFIs rejoiced and business with each other started booming.
Now, however, banks are proving to be fair weather friends. Sriram says they are drying up funding supply to MFIs in other states. “The best way is for banks to come in, talk to the state government, buy out the portfolio at a deep discount and try and recover at least some money so that the credit culture is restored,” he points out. Problem is, MFIs are now banking on other states for survival. State-based Share Microfin and Spandana Sphoorty Financial Limited had said they would reduce their exposure in the state from 40 per cent to 5-10—but this may not help any if funds in those states are hard to access.
AN INDIFFERENT GOVERNMENT
You would imagine that the Andhra Government would have vested interest in breaking this deadlock, but the state apparently doesn’t think that it should play a role. “We never prevented them from doing their business. We are only asking them to follow ethical practices,” says SERP’s Rajsekhar. “We are regulating only the money lending part. We are not regulating their governance, their board. So where is the problem?,” he adds.
Alok Prasad, the CEO of Microfinance Institutions Network (MFIN)—a self-regulatory organisation of NBFC MFIs set up in March 2010—doesn’t agree. “Has the ANDHRA government at any stage wanted to take things forward?,” he asks. “Whenever MFIN proposed solutions and wanted discussions, the government turned it down saying the time was not right. We even wanted to work in a public-private partnership model, but it is not acceptable to the government. They have crippled the culture of repayment, how can you lend if you are not repaid?” he wonders.
Currently, post the Act, MFIs say they don’t charge beyond 24 per cent but that hasn’t really helped any since there is no lending happening as of now in the state. Most borrowers in Andhra have already taken a loan from MFIs, says a government official, and the Act states that an MFI cannot lend again to the same borrower, which is an unfortunate double whammy for them.
A BLEAK FUTURE
This means that MFIs are desperate for cash and their lender banks are hoping that their loan books don’t collapse overnight. In order to salvage the situation, the State Bank of India in Andhra for instance, is thinking of leveraging their MFI clients into ‘Business Correspondents’ which will entail collecting deposits in rural areas on behalf of SBI in return for a fee. (If this happens it will be executed through a separate company). “Banks have lent a substantial amount and we have to restructure it. MFIs entered and grew in unreached areas as banks failed to do so. Financial inclusion has to be done by all banks and roping in MFIs who already have infrastructure and people in place is one way,” says an SBI official. So far, the bank has approached Spandana and Trident with its proposal.
Nevertheless, this is like putting a band-aid on a ruptured artery and most insiders don’t see any respite for the industry. “Unless there is some middle ground and some negotiation, the stalemate will continue. The initiative should come from the MFIs as they have everything to lose. The state government has really nothing to lose and it will not take the first step,” says Sriram.
Meanwhile, the MFIs are hopeful that a policy change will breathe new life into them. Of late, there is also a renewed interest by private equity players: According to reports, over Rs 600 crore is set to flow into the sector over the next six months. The new draft Micro Finance (Development and Regulation) Bill 2011 has also brought in a glimmer of hope.
But, for MFIs to see a new dawn, there needs to be a lot more than just these measures.
