MicroSave Update on Andhra Pradesh Microfinance Crisis

MICROSAVE UPDATE – COMPENDIUM OF NEWS ON ANDHRA CRISIS

The Turn of Events and Current Status

There are times when “I told you so” is the least desirable outcome but the worst fears/concerns highlighted by MicroSave over the past two years have begun to come true.

The current Andhra crisis started when the Task Force Committee (TFC) started receiving complaints related to unethical practices of some of the MFIs working in Andhra Pradesh. Simultaneously concerns were raised by NABARD and other regulatory authorities which led to demands for more stringent regulatory requirements for the MFI sector.

Andhra Pradesh Government Cracks Down on Predatory Practices of Microfinance Institutions

Benami Loans: Pay for What you Don’t Owe

The Reserve Bank of India also raised concerns regarding nationalized banks providing subsidized loans (under priority sector lending norms) to profitable MFIs. The microfinance sector in India is mainly financed (around 70 to 80%) through on-lending funds provided by banks. Another major concern at this stage came from the Finance Ministry’s directive to banks to ensure that the MFIs to which they lend cap their interest rate at 22-24%. Further to this RBI formed a sub-committee to look into the concerns raised in media regarding high-interest rates, coercive recovery practices, and multiple lending by MFIs.

Don’t Cap Microfinance Lending Rates

Andhra Pradesh Microfinance Institutions Ordinance, 2010

Meanwhile, the Andhra Pradesh state government passed the  – ‘Andhra Pradesh Microfinance Institutions (regulation of money lending) Ordinance, 2010’ – to protect the women’s self-help groups from the exploitation of MFIs in the state of Andhra Pradesh and for the matters connected therewith or incidental thereto.

The ordinance talks about the following main items:

• Registration of MFIs
• Register of MFIs
• Member of SHG not to be a member of more than one SHG
• MFIs not to seek security for the loan
• Display of interest rates charged by MFIs
• The maximum amount of interest recoverable on loans discharged
• Prior approval for grant of further loans to SHGs or their members
• Duty of MFIs to maintain accounts and furnish copies
• Submission of monthly statements by MFIs
• Power to require the production of records or documents and power of entry, inspection, and seizure
• Complaints
• Settlement of disputes procedure
• Penalty for coercive  actions by MFIs

The ordinance, judging by the way it was developed and enforced, is reactionary in nature to the turn of events outlined above, and is based on the premise to prevent exploitation of Self Help Groups (SHGs) being promoted by the state government programs. AP government program like Society for Elimination of Rural Poverty (SERP) has a huge mandate to disburse loans to the tune of Rs.100,000 crore  (USD 22.2 billion) and see the working of MFIs as a major threat to their program.

The ordinance seems to protect the interest of the clients but for the following reasons it has the potential to destroy or completely change the MFI sector in India:

1. MFIs have to register with the local legal authority before granting or recovery of loans from SHG members – this essentially means that the MFIs will not be able to recover their loans until and unless they register with the local authorities and will bring them under the ambit of Indian Money Lending Act, and thus subject to usury laws and interest rate caps. However, the ordinance does not talk about any interest rate cap except that it prohibits MFIs to charge more interest than the principal amount lent out by them. This in effect does not mean much as most MFI loans are for a period of one year and the average interest rates vary from 24 to 36%. The time given for registration is only 30 days from the date the ordinance was passed by the state assembly.
2. The registering authority is the ‘Project Director’ District Rural Development Authority in rural areas and MEPMA in the urban areas or any other person appointed by the District Collector – this is being viewed by the MFIs as an infringement on their operations by local government officials.
3. Upon receiving complaints from an SHG or its members, the registering authority may cancel the registration of the MFIs – this again is being viewed by MFIs as an infringement of their rights and the general feeling is that this rule may be abused by local district officials.
4. The ordinance also says that all loan repayments should be made in the Gram Panchayat on a monthly basis – this clearly will have a significant impact on the established methodology of the MFIs. Logistically this will also make it much more difficult for clients, who have to move to the Gram Panchayat to make their loan repayments.

Immediately after the promulgation of the ordinance the offices of SKS, Spandana, Share Microfin, Basix, and other large MFIs were raided by district officials throughout Andhra Pradesh.

At the same time, banks began to turn off access to funds for MFIs, and members did not repay as the MFIs could not collect the money without completing their registration. With more than 40% of Indian, MFI lending is concentrated in Andhra Pradesh it is estimated that around Rs.10,000 crore or (USD 2.2 billion) of principal outstanding is at risk on which the repayments have stopped till the registration of the MFIs is complete.

Meanwhile, the Microfinance Institutions Network (MFIN) and two other MFIs moved to the court for quashing of the ordinance and also to allow for recovery of loans. However, in a recent ruling, the A.P High court refused to grant a stay on the ordinance and said that the state government has the right to regulate the activities of the MFIs.

Interestingly, most of this loan portfolio now at risk has come from the banks in the form of on-lending funds to the MFIs. Therefore, if the field level defaults continue, the banks who have lent to the MFIs under the priority sector norms will suffer a serious impact on their portfolio.

Events that happened after the ordinance became a law:

1. MFIN has asked for a comprehensive regulator for the sector to check indiscipline in the functioning of the sector. The Financial Express reports “MFI Body Seeks Regulator to Check Indiscipline in Sector.”
2. RBI set up the Malegam sub-committee to study the issues and concerns in the microfinance sector, reports India Microfinance Business News “RBI Sets Broad Framework for Malegam to Study Indian Microfinance Sector.”
3. SKS reduced its interest rate on micro-loans from 26.69% to 24.55 % and translates it into a flat interest rate of 12.55% per month.
4. Similarly, Spandana also reduced its Agri Family loans by 3%. The India Microfinance Business News reports “SKS Microfinance Reduces Interest Rates by 2%.”
5. Pranab Mukherjee (Finance Minister, GoI) urged the Andhra to the government to soften ordinance terms and also expressed his view that the time was not yet right to appoint a regulator for the sector. DNA India reports “Pranab Mukherjee Urges Andhra to Soften Ordinance Terms”.

1. The share price of SKS Microfinance, which was the first microfinance institution in India to raise money through listing on Indian stock exchange, lost much of its steam after the A.P. crisis and was trading below its issue price. This is an important development as other bigger MFIs with head office in A.P were planning to hit the market in a year’s time with their IPOs. Moneycontrol reports “SKS Microfinance Slips Below Issue Price.”
2. Recent estimates suggest that in recoveries in A.P. have dropped to about 40% on average.
3. Sa-Dhan, a microfinance network organization, organized a meeting of its member organizations, financing banks and representatives of Government of A.P., in a bid to find solutions to the current crisis and also reiterate commitment to Sa-Dhan’s code of conduct for microfinance institutions.
4. On 1^st of November, A. P. Government has also established four committees – Implementation, Legal, Capacity Building and Information Technology for effective implementation of the ordinance, reports Business Standard “AP Forms 4 Committees for Implementing Ordinance on MFIs.”

Overall the ground realities for MFI operations have changed overnight with the coming of the ordinance. There is a serious threat to the credit discipline of MFI borrowers with the registration issues and the choking of funds by the banks. Though recoveries have been allowed by the High Court, the methods suggested by the ordinance will greatly affect the lending methodologies of MFIs and also make it highly easy for members to evade loan repayments.

As per the recent developments, MFIs have started registering themselves with the local district officials and have also started collecting repayments from the borrowers. There is also an effort to upload client data of the MFIs and the government to prevent multiple lending.

Orissa – Crisis brewing on the sidelines

It is fair to expect that the approaches taken by the State Government of Andhra Pradesh are likely to be replicated in other states. The grapevine is already abuzz with the news that the State of Orissa may come up with something similar. On the other hand, the Union Finance Minister has given a statement that –“state governments should not be very restricting and leave the regulation of NBFCs to the Reserve Bank of India”. This story continues to unfold on a daily basis.

The A.P crisis has impacted the Indian microfinance and simultaneously has shaken some investor confidence in the microfinance sector. MicroSave’s Capital Advisory Services (CAS) group is keeping tabs on events and will follow this Update with news pieces and investment scenario analyses.