Mumbai/Hyderabad: Fresh loan disbursements by microfinance institutions (MFIs) have come to a virtual halt in Andhra Pradesh (AP), the country’s biggest market for tiny loans advanced to poor borrowers, where the state government has cracked down on alleged coercive practices by microlenders.
For instance, SKS Microfinance Ltd, the largest and only listed MFI in India, has received approval from state authorities for only 29 loans in the past 10 weeks after submitting 1,600 applications. Typically, it would have disbursed 500,000 loans in the time, SKS spokesman Atul Takle said.
SKS has 2.2 million borrowers in AP and 9.5 million borrowers across India. The microlender, which went public in August, is the third largest MFI in AP with a 17% market share as of 19 November. Only Spandana Sphoorty Financial Ltd (25%) and Share Microfin Ltd (23.3%) have a bigger presence in the state.
The state government in October passed an ordinance tightening regulation of MFIs, accused by critics of adopting coercive loan recovery methods, charging high rates of interest and blamed for the suicides of some borrowers who were unable to repay loans.
The ordinance, which has since been passed into law, requires MFIs to seek the state government’s approval before lending to borrowers who already have an outstanding loan. It also bans the institutions from lending to any household that already has two loans to service.
Andhra Pradesh accounts for more than a quarter of the total market for India’s Rs20,000 crore microfinance industry, which plunged into a crisis after the crackdown, with commercial banks cutting off their funding tap.
MFIs say the loan approval process overseen by the District Rural Development Agency (DRDA), which decides a borrower’s eligibility for an MFI loan, is extremely slow.
“It’s difficult to document the applications as many borrowers do not have the details of their existing loans,” said the head of a leading MFI, which has significant operations in Andhra Pradesh, on condition of anonymity. “The registration authorities are not equipped to clear applications fast. After all, they need to physically verify all facts.”
Padmaja Reddy, chief executive officer of Spandana Sphoorty, said borrowers who are part of self-help groups (SHGs), first require approvals from their respective SHGs to enable MFIs to extend loans to them. At the second stage, MFIs have to seek approvals from DRDAs.
“As neither SHGs nor DRDAs are clearing our applications for weeks, our loan disbursals have got badly affected last few weeks,” said Reddy.
Spandana Sphoorty used to disburse an average Rs200 crore of loans a week in Andhra Pradesh, but now is finding it difficult even to disburse Rs2 crore a month, Reddy said.
M. Udaia Kumar, managing director of Share Microfin, another leading MFI in the state, said besides the bureaucratic delays, a sharp fall in the loan recovery rate has also impacted the ability of microlenders to make fresh disbursals.
“Our loan recoveries in AP have come down to as low as 15% from a high of 99% before the Act came into effect while we are unable to extend fresh loans in the state,” Udaia Kumar said.
The microlender quoted in the first instance blamed the dramatic drop in new loan sanctions and disbursals on the drop in recovery of loans. Repayment by borrowers in the state fell to 5-10% in some cases in November after a campaign by some political parties urging borrowers not to pay their dues.
“Since we’re not giving new loans, the borrowers now care less about repaying old loans as they think we will close shop here,” this person said.
The absence of an adequate forum to access client data is also impeding the government’s approval process, he said, adding that the government was in the process of setting up a credit information bureau.
For its part, the AP government denied any knowledge of instances where fresh loan disbursals have been affected.
“None of the MFIs have brought to our notice so far of any delays in clearances to their applications pending with SHGs and DRDAs,” said Reddy Subrahmanyam, principal secretary with AP’s rural development and panchayat raj ministry.
MFIs are in the business of giving small loans to low-income borrowers at an interest rate higher than what is charged by commercial banks. Typically, they borrow at 9-12% from banks and on-lend the money to borrowers at 24-32%. Indian banks had total loans outstanding of Rs.14,000 crore to MFIs as of 31 March.
Microfinance Institutions Network, an association of microlenders, has challenged the law tightening regulations on them in the state high court.
Among other things, the law also prohibits weekly debt recoveries and doing business on a customer’s doorstep where, typically, MFIs collect loan repayments.