Mumbai: The increased regulatory heat on microfinanciers could scorch them as well as the banks from whom they have borrowed.
A controversial ordinance by the Andhra Pradesh government seeks to regulate microfinance institutions (MFIs) in the state and put a stop to the coercion allegedly used by some of them to recover money from borrowers.
The ordinance, which came in the wake of a series of suicide cases in the state, has still not led to legislation, but experts warn that banks could be burdened with higher bad loans in case MFI operations are hit in their largest market.
“It is likely that banks may see large defaults from MFIs in Andhra due to the operational issues following the ordinance. More importantly, talk on waiving the loans of MFI clients may further impact the credit culture of borrowers,” said a senior executive with a private sector bank. He requested anonymity.
Senior officials in the microfinance industry hint at similar systemic risks.
“If they (Andhra Pradesh) enforce the law, this may affect operations and the repayment from borrowers will not come on time. If the situation continues for a long term, there may be large defaults (on bank loans),” said Chandra Shekhar Ghosh, chairman and managing director of Bandhan, the fourth largest MFI in the country. Bandhan has borrowed around Rs1,600 crore from 30 banks and financial institutions.
Indian banks have a combined exposure of around Rs16,000 crore to MFIs, with around one-third of this in Andhra Pradesh alone, according to Credit Analysis and Research Ltd (Care) a credit rating agency.
“This (the ordinance) may impact the growth and the asset quality of various MFIs. Further, this may also have a bearing on resource-raising abilities and profitability of MFIs,” said D.R. Dogra, managing director and chief executive officer of Care.
The Andhra Pradesh ordinance has several stringent clauses.
For example, it prohibits MFIs from recovering interest dues that are more than principal loan amount.
Also, MFIs will have to go through local bodies such as panchayats for loan recoveries from individual borrowers every month.
Currently, a majority of MFIs collect from clients every week.
The ordinance also prevents a borrower from taking more than two microcredit loans at any given point in time.
The regulatory steps taken by Andhra Pradesh are a litmus test for microfinance oversight elsewhere in India. The lack of clarity on regulatory matters has led to a “wait and watch approach” from banks who are already hesitant to offer new loans to MFIs, senior officials at two state-run banks said independently. They did not want to be named.
“We are awaiting for more clarity on aspects like regulation and the change in the mode of functioning of such firms. I would not be able to tell how long this situation will continue,” one of the officials said.
Among the banks, Small Industries Development Bank of India Ltd is estimated to have an exposure of around Rs4,000 crore to MFIs.
The country’s largest private sector lender, ICICI Bank Ltd, has lent around Rs 2,000 crore to MFIs while State Bank of India, the country’s largest lender, has an exposure of over Rs 1,000 crore, according to data from Care.
Other banks, which have significant exposure to the microfinance sector include Punjab National Bank, HDFC Bank Ltd, Indian Overseas Bank, Central Bank of India, Bank of Baroda, Union Bank of India and Andhra Bank Ltd, which have exposure in the range of Rs 200-800 crore, Care data showed.
“It is possible that any potential change in regulations may impact the sector’s growth, access to funding, asset quality and operational costs over the near-to-medium-term,” rating agency Crisil Ltd said in a report.
The Indian microfinance industry has had to face sharp criticism for high interest rates charged to borrowers and strong-arm business practices. SKS Microfinance Ltd has this week voluntarily cut lending rates.
Microfinance Institutions Network, an industry body, had challenged the ordinance in the Andhra Pradesh high court on the ground that microfinance firms are under the regulatory purview of the Reserve Bank of India (RBI) and the ordinance could impact the operations of microfinance industry in the state.
Following this, on 22 October, in an interim order, the high court had allowed MFIs to resume normal business activities, but directed these firms to register their activities with the state government within a week as per the ordinance, and adhere to the sections of ordinance pertaining to interest rates charged on loans and coercive recovery practices.
While RBI is the regulator for those MFIs operating as non-banking financial companies, a majority of the remaining MFIs, which operate as self-help groups, trusts and non-governmental organizations, are unregulated.
Even as the microfinance controversies have come to a boil, the sector has attracted policy attention.
RBI has set up a sub-committee headed by chartered accountant Y.H. Malegam to study the issues in the microfinance sector. It is expected to submit its report in three months.
The finance ministry had recently written to state-run banks asking them to ensure that the lending rates charged by large MFIs from their borrowers are not more than 24% a year.
Even for smaller MFIs, banks need to “finalize a road map” while sanctioning new loans to ensure that rates are brought down in a phased manner, the ministry had said.