Mumbai: It’s likely to be a low-key Diwali for subprime borrowers in Andhra Pradesh this year.
The festival season is typically the peak season for microfinance institutions (MFIs) in this southern state, but the controversial ordinance from the state government has unsettled the situation on the ground.
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Senior MFI officials said the ordinance may ring the death knell for the microfinance industry as it will make the recovery of tiny loans very difficult.
During festivals, there is a spurt in the lending activities of MFIs as people buy things ranging from new clothes to crackers and small-scale manufacturing and trading activities need greater cash flow.
The ordinance, yet to be legislated, seeks to check alleged coercive methods used by MFIs to recover loans from borrowers. It prohibits them from doing doorstep business, giving multiple loans to a single borrower and collecting money weekly from loan holders.
According to the ordinance, MFIs can recover loans only at the local gram panchayat office, and that too once in a month.
Typically, MFIs recover loans every week and sometimes even everyday.
The ordinance also prohibits MFIs from doing transactions at the doorsteps of consumers.
MFIs fear that these changes can hamper their business and lead to a rise in loan defaults as majority of their clients, who are daily labourers, farmers and vendors, cannot hold the money till the end of the month on account of their income pattern.
The lenders also lose frequent contact with the borrower and fail to assess the repayment capability of clients, they said.
“The whole MFI model in Andhra is based on this group model, where transactions take place at the centre meetings. The ordinance makes it impossible for this model to work,” Samit Ghosh, managing director of Bangalore-based microfinance firm Ujjivan Financial Services Pvt. Ltd, said.
Centre meetings refer to the meetings of self-help groups.
Typically, MFIs hold such meetings every week where loan proposals are discussed and loans are disbursed. The ordinance stipulates that business transactions can only take place at a panchayat office once a month.
“The rate of recovery is likely to drop sharply with the new model coming in,” said Sajeev Viswanathan, managing director and CEO of Bhartiya Samruddhi Finance Ltd, the fifth largest MFI in the country.
“It’s impossible for thousands of customers to travel to panchayat offices and make repayments. This can lead to huge defaults and destroy the industry and in turn impact the quality of bank loans taken by MFIs,” Viswanathan, whose firm has operations in Andhra Pradesh, Maharashtra, Orissa and a total loan outstanding of Rs 1,800 crore to two million customers, said.
Andhra Pradesh accounts for more than a quarter of the total loan outstanding of MFIs in the country and the largest number of microfinance clients—6.25 million—among Indian states, according to Sadhan, an association of such firms.
According to Microfinance Institutions Network (MFIN), an industry lobby, banks’ exposure to MFIs in Andhra is around Rs 27,000 crore.
Small Industries Development Bank of India, ICICI Bank Ltd and State Bank of India have large exposure to MFIs in the southern state.
A significant chunk of borrowers have taken multiple loans in the state. With the new regulations coming in, the borrower needs to avail a no-objection certificate from authorities to avail a second loan.
Due to the uncertainty in the sector, many banks have already stopped giving fresh loans to MFIs and subsequently fresh loan flow from MFIs have also significantly reduced across the country, despite being the festive season, Viswanathan said.
“The issuances of fresh loans have significantly been reduced as there are no funds available (from banks).”
“If this situation continues for another one month, this can turn the entire Rs 27,000 crore exposure to MFIs bad and the recoveries from the state has already slowed down,” Viswanathan said.
As per the ordinance, MFIs are not allowed to commence business, until they register the names of all borrowers and employees with state authorities prior to doing business, which, according to the officials, is also a “cumbersome” task.
MFIN 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 and the ordinance could impact the operations of microfinance industry in the state.
The high court on 22 October allowed MFIs to resume normal business activities, but directed these firms to register their activities with the state government within a week.
On Friday, the high court granted two more weeks for MFIs to get registered with the rural development authorities.
The Indian microfinance industry has been facing sharp criticism for the high interest rate charges to borrowers and strong-arm business practices allegedly used by some MFIs.