Mumbai: Bank lending to microfinance institutions (MFIs), which dried up after Andhra Pradesh imposed a controversial law in October 2010, has started picking up, signalling a return of partial normalcy for the sector.
MFIs lend amounts of up to Rs.50,000 at 24-36% and get their money primarily from banks.
Analysts and MFI officials attributed the pickup in loan growth to the regulatory clarity in the sector after the Reserve Bank of India (RBI) framed norms to govern large microlenders, incorporated as non-banking financial companies (NBFCs).
Banks are still, however, not funding micro loans in Andhra Pradesh, which accounted for one-fourth of the entire MFI industry before the crisis hit.
According to the latest RBI data, in the 12 months ended December 2012, bank lending to micro credit, which also includes loans to self-help groups (SHGs), grew by 14.8%. SHGs are groups of six-seven women borrowers.
In the previous year, bank lending to this sector had shrunk by 27.1% as lenders were averse to exposures to the troubled sector.
In absolute terms, bank lending to micro credit rose to Rs.24,100 crore in December 2012 from Rs.21,000 crore a year back.
Besides the RBI regulations, hopes that the proposed national regulation on microfinance sector will take shape soon have added to banks’ confidence, officials said.
“Ever since the RBI regulations came, there has been more clarity both for lenders and borrowers in microfinance,” said Chandra Shekhar Ghosh, chairman and managing director of Kolkata-based Bandhan Financial Services Pvt. Ltd.
“Subsequently, banks have automatically resumed lending to the sector and the outlook remains positive,” he said.
A senior banker, who heads the rural lending business of a private sector bank, said MFIs are being regarded more favourably.
“The confidence on this sector, which was lost after the crisis, is slowly returning. That is what is reflecting in the numbers,” said the official who did not want to be named.
Banks typically lend to MFIs to meet the so-called priority sector requirement. This demands that at least 40% of their loans should be to agriculture, exports and economically weaker or deserving recipients.
In December 2011, RBI created a separate category of NBFC-MFIs, based on the recommendations of an expert panel headed by noted chartered accountant Y.H. Malegam. The central bank stipulated a 26% limit on the interest rate MFIs can charge borrowers. MFIs were also asked to make full provisioning for loan assets due for more than 180 days.
Subsequently, in August 2012, RBI relaxed the provisioning norms and allowed Andhra Pradesh-based MFIs to spread the provisioning burden over five years as these companies found it difficult to comply with the norms. Andhra Pradesh made up the bulk of the affected loans.
The apex bank also removed the interest rate cap, but stipulated a margin of 10%. For smaller MFIs, the margin was set at 12%.
For its part, the government is in the process of formulating a national regulation known as Microfinance Institutions (Development and Regulation) Bill, 2012.
The Bill is expected to take MFIs outside the purview of state-level legislation, including the controversial Andhra Pradesh law that pushed the sector into a crisis resulting in the assets of the industry halving in a two-year period.
For instance, Bandhan, the largest microlender in terms of assets, had a loan book of Rs.3,992 crore as of 31 January with 4.2 million customers—more than twice that of SKS Microfinance Pvt. Ltd, India’s only listed MFI. So far this fiscal, Bandhan has received fresh sanctions of Rs.1,945 crore from about 32 commercial banks, Ghosh said.
To be sure, fresh lending by banks in the last one year has only gone to MFIs outside Andhra Pradesh, while those in the southern state are starving for funds, said Kishore Kumar Puli, managing director and chief executive officer of Trident Microfin Pvt. Ltd, an MFI based in the state.
According to Puli, the verdict on a pending case filed by MFIs against the Andhra Pradesh government demanding the abolition of the controversial state law will be critical for their future.
“For AP-based MFIs, there has been no fresh funding since the beginning of the crisis. Both MFIs and banks are looking at the verdict, to have some certainty about future,” said Puli, who is also the head of the Andhra Pradesh chapter of Microfinance Institutions Network, an industry lobby group.
Andhra Pradesh, which used to account for one-fourth of the Indian microfinance sector till October 2010, promulgated the law in October 2010, following a series of suicides reported in the state allegedly due to coercive recovery methods employed by certain microlenders to get back money from borrowers.
The law banned MFIs from collecting money weekly, prevented doorstep business and made it mandatory for them to secure government approval to issue fresh loans. Along with these, a state-wide campaign by the Telugu Desam Party encouraging people not to pay back loans, worsened the situation.
The recovery rate from borrowers fell to less than 5% in the state from 97-99%.
Most of the microlenders, including SKS Microfinance, virtually stopped fresh lending in the southern state and wrote off their loan exposure in Andhra Pradesh. SKS has written off loans totalling Rs.1,362 crore and pared its staff in the state to 1,100 from around 7,000 prior to the crisis.
SKS has also scaled down the number of branches in Andhra Pradesh to 110 from 550.
Santosh Singh, analyst at Espirito Santo Securities India Pvt. Ltd, said the availability of funding to the sector has substantially improved, but the political risk is still looming over microfinance companies.
“This year, the availability of funding is better than last year, mainly because of clarity on regulation. Outlook for microlenders is positive, but the political risk is a major issue,” he said.