Hyderabad: India’s microfinance industry has been in decline since the Andhra Pradesh government last year imposed restrictions on how the institutions conduct their business and obtain repayments from borrowers. While repayments fell after the restrictions were imposed, lenders stopped giving loans to microfinance institutions (MFIs), forcing the industry to shrink in size.
The Micro Finance Institutions Network (MFIN), which represents nearly 85% of MFIs, has opened talks with the Andhra Pradesh government to resolve the crisis. In a telephonic interview, Alok Prasad, chief executive officer, MFIN, said microlenders are willing to make financial sacrifices if the government can make the necessary legislative changes to restore normalcy. Edited excerpts:
Lending woes: Alok Prasad
The industry’s size has declined to around Rs 20,000 crore from Rs 30,000 crore a year ago. How is the overall situation?
Let me classify the industry into two parts: one is outside Andhra Pradesh, and the other is Andhra Pradesh.
Outside Andhra Pradesh, the good strong tier I MFIs and tier II-plus MFIs are holding their ground quite well. Some of them are now also beginning to get bank funding; a few of them also got equity infusion. Their position overall has shown some improvement when compared with two-three months back, when the picture looked very dismal. I think the picture of cautious optimism is building up.
However, this I said pertains to large MFIs and tier II MFIs, who are financially sound, have good governance structures, and have models which the bankers are feeling more comfortable about. If you look at small MFIs, I am saying the tier II-minus and tier III MFIs, with them definitely there is an issue, and their balance sheets are small and they tend to be not so well capitalized, and as a consequence, bankers are definitely holding back. Equally, their ability to attract new investment from private equity investors has also taken a hit.
The situation in Andhra Pradesh is still worrisome, with little or no repayments happening. What’s worrying is there is no fresh lending happening; the industry has come to a standstill. At least five MFIs have enrolled for corporate debt restructuring with their bankers and are hoping things will turn around in Andhra Pradesh. But smaller MFIs may have to go out of business.
MFIN has come out with a proposal that includes reduction of interest rates and restructuring of loans. Has this made any impression on the Andhra Pradesh government?
It is a very good and pro-poor package which we have put together to provide for substantive relief to the borrowers of Andhra Pradesh. I am not able to share more details for the reason, that is the understanding we have, that we will not go public on details unless we get to a stage where a handshake is happening. We are categorically saying that the loans of the borrowers will be restructured so that the term for repayment will be extended, the overall debt repayment burden is substantially reduced.
The financial hit of all that is something MFIs said they are prepared to absorb. In turn, what we are seeking from the government is normalization of conditions on the ground and making the necessary changes to the rules and the regulation...
Do you see banks resuming lending to the sector?
Overall, without fresh lending by banks, the industry would remain in a crisis mode. Banks are still cautious in lending to the microfinance sector. Without fresh funding, the industry is shrinking. Microfinance institutions so far haven’t defaulted on their loans and are repaying existing loans to banks, as per their contractual obligations.
Are you seeking changes in the microfinance draft Bill?
I was a member of the committee and was closely involved with the screening of the draft bill. Right now, the position is that the Bill is with the Reserve Bank of India for comments and Reserve Bank views are awaited. So, broadly everybody has welcomed the draft Bill, barring little matters of details here or there. Except for the government of Andhra Pradesh, every other stakeholder has welcomed the Bill, including other state governments. The government of AP (Andhra Pradesh) is completely in a different category with regard to the opposition to the Bill. Some minor changes can always take place...