Mumbai/Hyderabad: Two years ago, Andhra Pradesh successfully brought to heel what it perceived to be a rapacious microfinance sector through an ordinance and then a law. Over-zealous microfinance institutions (MFIs), having first laden small borrowers with debt, were aggressively pushing for repayment, driving people to suicide.
Now the MFI business, once mostly concentrated in Andhra Pradesh, is more or less dead in the state. On the other hand, the law has resulted in their borrowers being forced to resort to money-lenders, with the result that the scourge of bonded labour may be back.
Radhamani is a 40-year-old housewife from Mogiligidda village in the Mahabubnagar district of Andhra Pradesh. She’s forced to work for no wages on the farm of a local moneylender to repay a ₹ 6,000 loan taken about a year ago when her husband fell ill and she needed to keep the household—which includes two school-going children—running.
The only alternative at the time was to pay a steep 5% per month for the small loan, impossible to service with her meagre earnings from the sale of vegetables in the local market.
“I decided to work for him in the field rather than have him knocking on my doors every other day, because that will scare my kids," she said.
Reddy Subramaniam, principal architect of the state’s MFI law, is unapologetic about its impact. Currently principal secretary (rural), Subramaniam rejects outright any notion that things have actually got worse.
“I think all of it is a set of lies. There is no truth in the allegations that the law has pushed people back to the hands of moneylenders. Money lending is an approved activity," he said. “Even before the law was enacted, one-third share of this market was with moneylenders, which remains at that level even now. So how do you say that?"
Subramaniam doesn’t regret the law that was used to rein in the 16-year-old MFI industry.
“The particular regulation was utmost necessary and was guided by the seriousness of the situation," he said.
Even the Reserve Bank of India (RBI) regulation, aimed at preventing coercive repayment activities, wasn’t effective, he said.
“Finally, at that point, we had to come out with the law," Subramaniam said.
Radhamani’s case is not an isolated one. Bharathamma is a 43-year-old flower seller in Moinabad village in Ranga Reddy district, some 30km from Hyderabad. Earlier, she used to regularly borrow funds from MFIs to run her small flower vending business. She’s been forced to borrow up to the hilt from moneylenders.
Yes the MFIs have suffered because of the Andhra Pradesh Microfinance Institutions (Regulation of Moneylending) Act, 2010, but Radhamani and Bharatamma are also big-time losers, along with 10 million other distressed borrowers from MFIs and so-called self-help groups (SHGs), small groups of women borrowers. These 10 million are defaulters according to credit bureaus, making them technically ineligible for any fresh loans from lending institutions.
These people are currently trapped in a tussle over regulation, with the state government unwilling to relent and allow the central bank to oversee the governance of such small companies that typically lend small sums to low-income borrowers at 24-36%.
“Borrowers in Andhra Pradesh are feeling the pain. They are desperately borrowing from moneylenders at rates more than double compared to what it was in the pre-crisis period," said Sanjay Sinha, managing director of Micro-Credit Ratings International Ltd (M-Cril), the largest ratings agency operating in India’s microfinance industry.
It all started when India’s finance ministry, in September 2010, issued a diktat to public sector banks directing them to make sure that MFIs borrowing from them lend that money at “reasonable rates", following reports of a series of suicides due to alleged coercion, which had drawn nationwide political and media attention.
For 15 years or so, microlenders had ridden a wave of success and general approbation for providing loans to poor borrowers who wouldn’t get money from a bank. That came to an end with the new rules, which prohibited microlenders from collecting doorstep repayments. They also had to seek government approval for any second loan given to borrowers.
A state-wide campaign by the opposition Telugu Desam Party asking borrowers not to repay loans led to a wave of defaults and a sharp deterioration in the credit culture in Andhra Pradesh. Repayment rates plummeted to 5% from 96-99% in the state. The industry estimates that nearly ₹ 6,5,00 crore of loans in Andhra Pradesh are stuck.
As signs of trouble emerged, risk-averse commercial banks didn’t think twice before shutting off funding channels.
Bharathamma used to borrow from Share Microfin Ltd to fund her business activity. That stopped two years ago, forcing her to borrow from moneylenders. For the mother of three, a monthly income of ₹ 3,000 is not enough to run her home and service the ₹ 25,000 she’s borrowed from the moneylenders.
“Our incomes have been the same for years, while expenses have shot up," she said.
Millions of borrowers have found themselves at a similar dead end because SHGs also suffered a setback along with MFIs when the banks cut lending to such groups in the aftermath of the crisis as repayment rates slumped.
Loan outstanding to micro credit, which includes loans to SHGs and MFIs, declined to ₹ 21,120 crore in July 2012 from ₹ 24,090 crore in July 2010, according to RBI data.
M-Cril’s Sinha said he doesn’t expect funding from MFIs to revive at least in the next three-four years.
A series of directives by the central bank and promises of federal regulation have done little to improve the lot of borrowers in the southern state.
“Weekly, groups used to lend to us and we were not so worried about getting money then, but that is not the case anymore," said Bharathamma. The housewife had borrowed ₹ 15,000 from Share Microfin and eventually defaulted on ₹ 7,000 of that.
“The formal credit system, including the SHGs in Andhra Pradesh, have not been able to fully address the gap left by the MFIs for borrowers," said Bindu Ananth, president, IFMR Trust, a private trust that operates in the financial services sector.
“A recent study by Microsave (a financial services firm operating in the microfinance industry) shows that this gap is being filled by informal sources like moneylenders and private institutions. The more important question is whether this change in the credit landscape has made the borrowers in AP (Andhra Pradesh) better off or not?"
The crisis has led to the emergence of what are known as 40-day lenders in the southern state. Under this typical ever-greening model, 40-day loans are given at a minimum 10% interest rate a month. With most borrowers unable to repay the whole amount in 40 days, they keep renewing the loan by just paying the interest amount, Sinha said.
Ananth of IFMR Trust agreed: “Post crisis, the cost of funds for the poor has certainly gone up as informal lenders have replaced MFIs. However, it is difficult to quantify how much the rates have gone up."
According to a November, 2011 survey conducted by Microsave, a significantly large proportion (61%) of the respondents said that they had borrowed from MFIs to redeem high-cost loans from moneylenders, or to pay other MFIs.
“The availability of good credit is virtually nil for poor borrowers," said Mathew Titus, executive director at Sa-Dhan. “One can very well see such borrowers struggling to secure small loans as low as ₹ 500 or ₹ 1,000 to manage their small businesses."
The stress is more severe in the Rayalaseema and Telegana regions of Andhra Pradesh as against the coastal belt.
Moneylenders have increased lending in the 10 months ended November in areas where MFIs’ operations were prominent, the study showed.
“The biggest beneficiaries of the Andhra Pradesh Act have been moneylenders, who are now using the absence of microfinance institutions to tap the poor borrowers by charging exorbitant rates of interest," said Alok Prasad, chief executive officer of Microfinance Institutions Network, an industry body.
Moneylenders have also raised interest rates in the last two years after the microfinance companies disappeared. “Before the crisis hit the sector, moneylenders used to charge 2-3%. Now it has gone up to a minimum 5-6% a month," Sinha of M-Cril said.
After the clampdown on MFIs, the state government launched an apex credit society—Sthreenidhi—to make available loans up to ₹ 50,000 repayable in five years and interest rates at a little more than what banks charged.
Although the Andhra Pradesh government initially planned to lend nearly ₹ 1,000 crore in this fiscal year, the credit society has so far managed to lend just ₹ 110 crore. Nor has it succeeded in reaching out to poor borrowers. As for Bharathamma, she, like many other women borrowers in Andhra Pradesh, hasn’t heard about Sthreenidhi.