Mumbai: A year after it enacted a law to control microfinance institutions (MFIs) in India’s largest market for small loans, the Andhra Pradesh government is set to give another jolt to the ailing sector.
The state will shortly float a cooperative that will lend to poor borrowers at about half the 24-36% interest rates private microlenders charge.
The state’s firm will destroy any scope for a level playing field and push private firms out of business, worry MFIs.
“Last year around the same time, they hit the industry with the state law. This year, this new company will severely erode our clientele if they offer money at half rate backed by government machinery,” said the chief executive of an Hyderabad-based MFI. He didn’t want to named.
The state’s MFI, Streenidhi Cooperative Society, will begin operations on 6 October.
The state government will have a 50% stake in the firm, with the rest being owned by a state-level federation of self-help groups (SHGs), which are collectives of a few women who mobilize savings and lend from that within the group.
The apex credit society will employ a similar principle, primarily mobilizing funds from the savings of members and offering loans at rates offered by commercial banks to borrowers, Reddy Subramaniam, principal secretary (rural), Andhra Pradesh, said in an interview on Wednesday.
Banks offer loans at 9-12% to individual borrowers depending on the type of the loan.
“We thought such an apex credit society is essential to provide credit at affordable rates to poor. MFIs provide very high-cost lending and many a time borrowers are not able to service it,” he said.
Nearly one million SHGs will provide Rs 500-600 crore a year to the society, he added.
In addition to this, smaller units of the state-level SHG federation will mobilize Rs 100 crore. The state government plans to match this contribution, Subramaniam said.
Andhra Pradesh, which accounts for more than a quarter of the Rs 20,000 crore Indian microlending industry, passed a law last October to control MFIs because these firms allegedly used coercive methods to recover money from borrowers.
The law prohibited MFIs operating in the state from collecting repayments every week and made government approval mandatory for every second microloan to a borrower.
MFIs saw collections falling to 5-10% in the state and were forced to halt fresh loan disbursals after commercial banks, their main source of funds, stopped lending to them due to the heightened uncertainty.
Andhra Pradesh has about one million SHGs that collectively have about 10 million members. Given that private MFIs in the state cater to the same set of clients, the government should ensure a level playing field, industry officials said.
“They can give loans at whatever rate they want. Multiple channels are good for borrowers. But let the players operate freely, the rules governing all should be equal,” said Alok Prasad, chief executive of Microfinance Institutions Network, an industry lobby. “Government should not create a biased market.”
A section of industry officials are sceptical about the success of the new venture, saying raising funds will be a challenge in the current market.
“It would be an utter failure,” said the MFI CEO quoted earlier. “The MFI portfolio in Andhra itself is Rs 7,200 crore. Unless they have credit lines to that much amount, it’s going to be a failure.”
Subramaniam expects banks, “which have a good relationship with SHGs”, to extend money to the credit society, but industry officials say banks will not want to lend in a market where repayments have deteriorated sharply.
Anurag Agrawal, co-founder and senior vice-president, Intellecap, which advises microlenders, said the government venture may work on a small scale but deteriorated credit culture in the market may hamper the plan.
“The government wants to crowd out the private sector from microfinance,” he said. “The underlying fact is they are targeting to collect money that belongs to poor women from a market where the credit culture is already spoiled.”