Hyderabad: State-owned Andhra Bank said on Monday that no loans extended to microfinance institutions (MFIs) had turned bad and none of them had sought a rescheduling of payments in the last quarter, calling it an indication the sector was able to generate sufficient cash flows outside the southern state to meet debt obligations in Andhra Pradesh, India’s biggest market for loans to the poor.
But some MFIs said they still faced a liquidity squeeze as they wait for banks and financial institutions to reopen the funding tap that was closed to them after the Andhra Pradesh government in October passed an ordinance that tightened regulations on the microfinance industry, making every loan disbursement subject to government scrutiny. The ordinance was later passed into law.
Even Andhra Bank has not disbursed any loans to MFIs after the passage of the ordinance, chairman and managing director R. Ramachandran said at a news conference in Hyderabad on Monday at which he announced results for the three months ended 31 December. Andhra Bank is the convenor of the state-level bankers’ committee, an inter-institutional forum of lenders.
“There are no pressing requests that we need to release funds immediately,” Ramachandran said. This shows that both banks and MFIs that operate in the state “have breathing space”, he said.
To be sure, Andhra Bank has limited exposure to MFIs. The bank had Rs 293 crore of loans outstanding to the microfinance industry at the end of December, down from Rs 310 crore at the end of September. At the end of the last financial year in March 2010, commercial banks had a combined Rs 14,000 crore in loans outstanding to the microfinance sector.
Andhra Pradesh accounts for about a quarter of the assets at India’s Rs 20,000 crore microfinance industry. The MFI loan recovery rate in the state has declined to as low as 15-20% on average since the Andhra Pradesh government tightened oversight of the industry, according to industry estimates.
MFI loan disbursals, too, have recorded a drop in the state. For instance, SKS Microfinance Ltd, India’s only listed micro lender, applied for government approval of 170 loan applications in the last three months, only 29 of which were approved two-and-a-half months later, said SKS spokesman Atul Takle.
SKS Microfinance last week reported that high provisions, loan write-offs and a drop in the loan recovery rate had caused its net profit to decline 38.41% in the December quarter. “Our collections outside the state have been more than 99%,” Takle said, adding that SKS Microfinance also had the cushion of proceeds from its initial public offering last year.
Not all micro lenders have such a cushion, and even MFIs with no exposure to Andhra Pradesh are facing a funding crunch, said Ujjivan Financial Services Pvt. Ltd founder Samit Ghosh. Ujjivan has no operations in the state. “Collections are not a problem outside AP, but no fresh funds are coming,” he said.