Mumbai: The Reserve Bank of India’s (RBI) move to allow lenders more time to classify loans as bad on account of the withdrawal of high-value bank notes has had an unintended consequence—it has prompted politicians in some states to tell people that their loans have been waived.
With local body and assembly elections already on or scheduled in some of these states, the micro-finance industry fears that political parties could end up pushing for loan waivers and encourage wilful default.
According to industry bodies such as Microfinance Institutions Network (MFIN) and SaDhan, local leaders in parts of Maharashtra, Uttar Pradesh, Madhya Pradesh and Kerala are telling people that their loans have been waived.
Last week, RBI provided 60 more days for classifying stressed standard accounts as non-performing assets (NPAs), if the payments are due between 1 November and 31 December. This was extended to banks and non-banking financial companies, including microfinance lenders.
“These local political leaders in Amravati, Aligarh and Moradabad, through pamphlets, are saying that these (microfinance institutions) are not legal institutions, hence you need not repay the loan forever. If you have taken a loan, come to us and we will write it off,” P. Satish, executive director of SaDhan, said. “Repayment rates in (some) areas have fallen to a very low level after the political leaders started spreading rumours,” he added.
Some political and social activists have been urging people, especially women borrowers, to stop repaying loans alleging coercive recovery methods of some micro-financiers, said microfinanciers.
On Sunday, polls were held in 164 municipal councils across 25 districts of Maharashtra, in the first phase of local body elections. The last phase of local body elections in the state is slated for 8 January. Preparations are on for assembly elections in Uttar Pradesh, Punjab, Goa, Uttarakhand and Manipur to be held next year.
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“We have met with the district collector of Amravati to apprise him of the situation. We are publishing ads as well as sending out press releases in all vernacular papers to make people aware that there is no loan waiver,” Ratna Vishwanath, chief executive officer of MFIN, said.
“For every day past the due date, interest accrues and it is important to educate borrowers accordingly. Else they will end up bearing an unnecessary burden,” she added.
According to MFIN, Maharashtra leads the list of states with the highest number of micro-finance institutions at 36, followed by Madhya Pradesh at 28, Uttar Pradesh at 20 and Kerala at 10. These states accounted for one-third of the Rs60,165 crore micro loan portfolio at the end of June.
Anil Bonde, a Bharatiya Janata Party legislator in Vidarbha’s Amravati district, categorically denied that his party was telling farmers that RBI had waived their loans. “We are only informing farmers about the decisions that the government and RBI have taken to reduce the inconvenience caused to them. Why would we tell them about loan waiver which hasn’t been announced,” Bonde said.
Microfinance firms operating in some of the election-bound states are already seeing a sharp drop in collections.
“We have seen a drop of repayment rates to 40% in areas like Aligarh, Moradabad and Bareilly compared to other parts of Uttar Pradesh, primarily on account of vested interests of local touts trying to seek political mileage,” said Anup Kumar Singh, director of Sonata Finance Pvt. Ltd, a Uttar Pradesh-based microfinance company with operations in more than 50 districts.
Analysts warn of a rise in NPAs for micro-finance firms in the next financial year. “The impact of these circulars on the books of micro-finance institutions will not be felt immediately. A loan account which becomes overdue in November will be classified as an NPA only after 150 days, i.e. three months as per regular NPA norms. Now, there’s an additional 2 months,” Karthik Srinivasan, senior vice-president at ICRA, said.
Abhiram Ghadyalpatil contributed to this story.