Mumbai: The collapse of the microfinance industry in Andhra Pradesh has made traditional money lenders in India’s fifth largest state active even as borrowers are either selling personal assets to improve cash flow or halting business expansion, an industry report released on Wednesday said.
The report by MicroSave—a microfinance advisory firm with offices in India, Indonesia, the Philippines and Uganda—also blames some practices followed by microfinance institutions (MFIs) operating in Andhra Pradesh for the crisis in the sector. These include an inadequate focus on the customer and a lack of transparency in pricing products.
MicroSave interacted with 340 borrowers, mostly women, in 76 sessions. While some of the findings are at the level of independent respondents, others capture the consensus of the group sessions.
In 59% of the sessions, respondents unanimously said that they had taken loans from money lenders in the absence of MFI credit. Daily finance companies—informal money lending entities—were the preferred choice of borrowers in 29% of the sessions.
Manoj Kumar Gupta, director of MicroSave, said the study was the result of independent research funded through grants from international agencies.
According, to the report, around one-quarter of the respondents shelved plans for business expansion as access to credit had become difficult and around 12% had to sell assets such as cattle and jewellery to meet marriage costs and school fees for children, among other expenses.
Andhra Pradesh MFIs agree that loan sharks and pawn shops have been doing brisk business for the last 8-10 months.
“With no source of funds, many borrowers have mortgaged their jewellery,” Kishore Kumar Puli, managing director of Trident Microfin Pvt. Ltd, said. “Even the daily financial companies have jacked up interest rates to take advantage of the situation.”
The Andhra Pradesh government passed a law in October 2010 laying down strict guidelines for MFIs operations. The state accounts for one-fifth of the microfinance business in India. The law was in response to some borrower suicides allegedly caused by coercive loan collection methods adopted by lenders of tiny loans to the poor.
Since then, repayment rates in the industry have fallen to 5-10% and fresh business has come to a halt.
The MicroSave report says that 90% of the respondents were willing to repay loans if MFIs can disburse fresh credit.
“Since fresh lending has stopped, it has led to a gap in the working capital cycle of these borrowers,” said Puli, who is also the state coordinator of Microfinance India Network, an industry lobby. “If the gap is not plugged with fresh funds, they cannot repay existing loans.”