The government and RBI must draw an MFI survival strategy before it’s too late. We need them at least till such time the banks are ready to reach out to the masses.
Andhra Pradesh, India’s fourth largest state by area and fifth largest by population, has set a world record. About 9.2 million borrowers in the southern state have defaulted in repaying money borrowed from microfinance institutions (MFIs)—the largest number of defaulters in any location in the world. As Andhra Pradesh has a population of 84.6 million (2011 census provisional figure), theoretically one in every 11 Andhraites is a defaulter. This, however, is not the actual case as most such borrowers have more than one account. By industry estimates, around four million people of the state—almost all women—have turned defaulters. As the female population in Andhra Pradesh is 42.1 million, one in every 10 women in this state has borrowed from MFIs but not repaid.
To put the Andhra phenomenon in perspective, in 2008, when the Indian government announced a Rs60,000 crore debt-waiver scheme for farmers across the nation, some 40 million farmers didn’t repay debt. Indeed, the money involved in Andhra Pradesh is minuscule compared with the national debt-waiver scheme, but the point to note is that in this case, the debt has not been waived even though a section of the local politicians has created that impression and encouraged borrowers not to pay back.
The MFI industry’s total exposure to Andhra Pradesh was around Rs. 7,200 crore in 2010 and they have been able to collect from the borrowers only 10% of this money. They are carrying on their books Rs. 6,500 crore worth of bad assets, and when they write off this amount in March, at the end of the current fiscal, many of India’s big MFIs’ net worth will turn negative. Unless the Reserve Bank of India (RBI) relaxes the prudential norms that stipulate a 15% capital adequacy ratio (Rs. 15 capital for every Rs. 100 worth of loans) for this set of financial intermediaries, many will have to shut shops.
The MFIs that will bear the brunt will include India’s lone listed microlender SKS Microfinance Ltd, Spandana Sphoorty Financial Ltd, Share Microfin Ltd, Asmitha Microfin Ltd and Vijay Mahajan-promoted Bhartiya Samruddhi Finance Ltd—India’s oldest MFI. In this pack, SKS Microfinance will be the least affected as it had raised money from the public through its capital float in August 2010; the others are in a bad shape. Some are restructuring the debt taken from banks. But even then, keeping themselves afloat is not an easy task as commercial banks, which provide 90% of resources that MFIs need for business, are not forthcoming in giving money for fear of piling up bad assets.
Interestingly, even the MFIs which do not have any direct exposure to Andhra Pradesh are being shunned by the banks. For instance, Arohan Financial Services Ltd, an MFI in West Bengal, hasn’t got any money from banks ever since the Andhra crisis broke out, even though it doesn’t have a single borrower in the southern state. For lack of resources, it is shrinking assets and closing down offices. Utkarsh Micro Finance Pvt. Ltd of Varanasi is another instance. It lends to poor people in eastern Uttar Pradesh and Bihar. In 2010 and early 2011, banks withdrew all lines of credit. Subsequently, a few banks have started sanctioning loans but they are not releasing money.
With no fresh money in the kitty and Andhra Pradesh borrowers not repaying loans, MFIs are forced to shrink loan books, close down offices and retrench employees. The outstanding loan book of the industry, which was Rs. 30,000 crore in October 2010, has shrunk to Rs. 15,000 crore in January, and at least 30% of 1,50,0000 employees have been shown the doors.
The origin of the crisis was in October 2010 when Andhra Pradesh, which accounted for at least a quarter of the microlending industry, promulgated a law to control microlenders after a spate of reported suicides following alleged coercive recovery practices adopted by some. The law, which restricted MFIs from collecting money from borrowers on a weekly basis, made government approval mandatory for borrowers taking more than one loan.
Subsequently, an RBI panel capped the loan rate by MFIs at 26% and the margin at 12%. These norms were fine when banks were giving money to MFIs at 11%. With the increase in interest rates, banks are now charging more; and if we add to that the processing fee and the cash margin that MFIs need to keep with the banks, the effective cost of money is at least 17%. No wonder then most MFIs are making losses.
There are a few exceptions though. Janalakshmi Financial Services, which takes care of the tiny loan needs of the urban poor, is one of them. The Bangalore-based firm has grown its assets from Rs. 80 crore in March 2010 to Rs. 260 crore now. Apart from giving tiny loans, Janalakshmi distributes financial products such as pension and insurance, and sells mortgages and enterprise loans through 66 branches across 41 cities in 11 states. The Kolkata-based Bandhan Financial Services Pvt. Ltd is another MFI. It has recently overtaken SKS in terms of loan book size. In January itself it achieved the year-end target and may end the fiscal with a loan book of Rs. 3,500 crore. Its bad assets have grown but are still way below 1% of total assets and it is making profits.
The death of the MFI industry will push the poor into the grip of moneylenders and deal a blow to the government’s financial inclusion drive. The government and RBI must draw an MFI survival strategy before it’s too late. We need them at least till such time the banks are ready to reach out to the masses. At the same time, the industry needs to get rid of its obsession for growth and learn from the Bandhan and Janalakshmi experiments to reorient its business models.