Mumbai: Three years from the enactment of a controversial law that aimed to regulate the microfinance industry in Andhra Pradesh, around 35,000 people working in the sector have been left jobless in the southern state, according to industry executives.
The biggest job cuts were enforced by India’s lone listed microlender, SKS Microfinance Ltd, which slashed its headcount by more than 15,000 in two-and-a-half years—from 25,735 in end-December 2010 to 9,959 in June 2013. Bhartiya Samruddhi Financial Services Ltd, commonly known as Basix, India’s oldest microlender, sacked about 9,000 staff.
Microfinance institutions (MFIs), which lend small sums of money to low-income borrowers, came under the scanner of authorities after reports of suicides due to alleged coercive recovery methods adopted by the MFIs.
The Andhra Pradesh law was enacted in October 2010 to regulate microlenders.
The law, aimed at reining in the alleged harassment of borrowers, banned MFIs from approaching the doorsteps of their customers, lengthened the loan recollection cycle from one week to one month, and made it mandatory for the lenders to get government approval to give a second loan to the same borrower.“This (joblessness) has happened over the last two years,” said Vijay Mahajan, group chairman of Basix. At its peak, it had 10,300 employees. “We did not need that many staff to take care of such a small loan book,” said Mahajan.
Basix’s pan-India performing loan book shrank to Rs.80 crore from Rs.1,800 crore prior to the crisis. For SKS, the loan book declined to Rs.1,283 crore in March 2013 from Rs.3,037 crore in March 2010.
The sackings have not been limited to large companies. Trident Microfinance Pvt. Ltd, which had a performing loan book of Rs.130 crore before the crisis, is now left with a performing loan portfolio of about Rs.18 crore, said Kishore Kumar Puli, Trident’s managing director and chief executive officer.
“The number of staff with Trident has come down to 188. The number was 780 when we had a bigger portfolio to take care of,” said Puli, whose firm is in talks with a group of bankers for a second round of debt recast to stay afloat in the microfinance business.
The headcount at another microlender, Spandana Sphoorty Financial Ltd, has come down to 4,400 from 13,500 in October 2010. While some of the former employees moved to other private financiers, many still remain jobless.
Before the crisis, Andhra Pradesh was the biggest market for microfinance, accounting for more than one-fourth of the total assets of the industry. The southern state is now home to about Rs.6,000 crore of bad loans.
MFIs depend on loans from large commercial banks. In 2011, banks restructured about Rs.6,000 crore worth of loans to six microlenders after the Reserve Bank of India (RBI) allowed them to do so without terming them non-performing assets or bad loans.
While the money raised from the initial share sale rescued SKS, Basix had to go for a Rs.650 crore loan recast in June 2012. But the debt restructuring hasn’t helped the majority of these companies resolve the crisis, as loan recovery from borrowers in Andhra Pradesh remains dismal.
Mahajan said Basix is pinning its hopes on focusing on non-Andhra Pradesh operations. But the company has seen a spillover effect of the crisis spreading to districts adjacent to Andhra Pradesh state, impacting the credit culture in these areas.
The regulations led to a slump in loan recoveries and a halt in bank funding to the sector. Though the Union government is in the process of framing legislation that is expected to overrule state laws on MFI regulation, there is no certainty over when the central law will come into force.
The size of the microlending industry nearly halved from Rs.30,000 crore, but has shown some pick-up due to growth in business outside Andhra Pradesh. The crisis has also impacted the financial health of low-income households in India’s fifth largest state.
“...the overall average treatment effect associated with banning microfinance in Andhra Pradesh was negative,” said a July report prepared by Renuka Sane and Susan Thomas of the Indira Gandhi Institute of Development Research, a think tank. According to the report, in Andhra Pradesh, consumption dropped 19.5% over the first four quarters after the microfinance law came into effect.
“In Andhra Pradesh, as things stand today, there is no future for microfinance. It’s like doing dialogue with the deaf,” said Alok Prasad, chief executive of Microfinance Institutions Network (Mfin), an industry body.
Some of the microfinance employees have turned pawnbrokers in the same field where they once operated as staff of well-established microlenders.
“They have become millionaires with their own moneylending businesses in Andhra Pradesh,” said G. Padmaja Reddy, founder and managing director of Spandana Sphoorty.
Prior to the crisis, the total workforce of the Indian microfinance sector was over 100,000, according to Prasad of Mfin. This came down to 65,000 post-crisis and now stands around 70,000. In Andhra Pradesh, most of the unemployed people are from rural areas, with average education qualification levels of Class 12.
“Our estimate based on the data collected from the field says anywhere between 30,000 and 35,000 people have lost jobs,” added Prasad.
Any improvement on the ground is unlikely as commercial banks are not willing to lend to Andhra Pradesh microlenders due to poor chances of loan recovery and business prospects.
“It’s like they have given up on us,” said Mahajan of Basix. Recently, RBI turned down a request by Andhra Pradesh- based MFIs to permit banks to recast their loans for a second time, without classifying these loans as bad loans.
Under current norms, banks need to set aside 15% of the loan amount as provision while restructuring a loan for the second time, treating it as a bad loan, while for a first-time recast, the provisioning requirement is 5%. For other loans, which are standard, the provisioning is 0.4%.
As of 23 August 2013, banks have a loan outstanding of Rs.17,600 crore to microcredit institutions that also includes loans to self-help groups and small groups of women borrowers.