Hyderabad: Manjula, who identifies herself by only one name, had been borrowing from microfinance institutions (MFIs) for five years and had a spotless repayment record.

That was until October, when the 26-year-old seamstress stopped payments on the last loan she took when she still owed 14,000.

Changing landscape: A file photo of microfinance borrowers at a village in Andhra Pradesh.Photo Bharath Sai/Mint

“My group leader instructed me not to pay the loan," said Manjula, whose income supplements the 2,000 her husband brings home every month from his job as a house painter.

Manjula and her husband, migrants from the Bellary region of Karnataka, live in Budugu, a shantytown on the outskirts of Hyderabad. The rest of Manjula’s five-member joint liability group (JLGs) also stopped repaying their MFI loans after the ordinance took effect.

JLGs are meant to act as peer pressure groups and to ensure members repay loans by making them collectively liable in case even one of them defaults.

They are a part of a larger group known as Sangam. In this case, the entire Sangam that grouped 25 members, led by 40-year-old Mamilla Bhudevi, stopped repaying their loans, which amounted to a total of 4 lakh.

More than six months after the Andhra Pradesh ordinance, the defaults are still mounting for MFIs in a state that made up a quarter of the loans at India’s 22,500 crore microfinance industry.

The loan recovery rate in Andhra Pradesh, India’s biggest market for loans to the unbanked poor, dropped to as low as 15-20% in the aftermath of the ordinance, which mandated MFIs to specify their areas of operation, interest rates, recovery methods and operational practices.

Loan applications were put under government scrutiny. Lenders were asked to stopped doorstep lending and to switch from a weekly to a monthly loan recovery system. MFI industry executives say the ordinance encouraged borrower defaults.

The Andhra Pradesh government has promoted “borrower indiscipline", said Alok Prasad, chief executive officer of industry body Microfinance Institutions Network (Mfin). “Government machinery is acting against us in Andhra Pradesh."

The ordinance was issued after MFIs were attacked by politicians and other critics for allegedly using coercive practices to recover loans from overleveraged customers and held responsible for suicides by debt-burdened borrowers.

“We repaid our loans for 33 weeks," then stopped, said Bhudevi, a Telugu Desam Party (TDP) worker, who cited a call to women by TDP president and former chief minister N. Chandrababu Naidu not ro repay loans they had taken from MFIs. Naidu had asked women to stop repaying loans until the government formed a regulator agency to oversee MFIs and interest rates were lowered from as high as 30%

Bhudevi borrowed 20,000 from SKS Microfinance Ltd. She took the loan to pay for the treatment of her husband who had suffered a paralytic stroke.

Bhudevi had been borrowing from MFIs for last seven years. She also took loans of 20,000 each from L&T Finance Ltd and Sharada Microfinance. “I took loans to repay the previous loans," she said.

For A. Gopal, a loan recovery agent for SKS Microfinance, India’s only listed MFI, it’s not business as usual. He recalls the crowded weekly meetings SKS Microfinance used to hold on Tuesdays, where new loans were disbursed and borrowers made repayments. Such meetings have become a monthly practice, but few customers turn up, he said.

“We still go and meet our clients on regular basis and persuade them to repay loans. While a few members started repaying back, most of them refuse even to talk to us and attend our calls," he said.

According to Mfin, MFIs have outstanding loans of around 6,000 crore in Andhra Pradesh.

“Recoveries in Andhra Pradesh have been dismal. The existing business environment for micro loans in Andhra Pradesh on the back of regulations imposed by the AP government is to a large extent restricting us in carrying out the normal business activities in the state," a spokesperson for Spandana Sphoorty Financial Ltd said in an email reply to questions.

Spandana has 1,500 crore of outstanding loans in Andhra Pradesh, out of a total loan book of 3,700 crore.

“The recoveries in Andhra Pradesh, to the best of my knowledge, are around 10-20%," said Prasad, the chief executive officer of Mfin. “The business has come to standstill, there is hardly any repayment, no new loans have been disbursed. It’s a question of survival for MFI sector in Andhra Pradesh."

Loan disbursals have fallen partly because of a funding crunch.

“In first of half of FY11, we (MFIs in Andhra Pradesh) disbursed 5,000 crore. In the second half, we could only disburse 8.5 crore," said Dilli Raj, chief financial officer at SKS Microfinance, which has outstanding loans of 1,250 crore in Andhra Pradesh.

Experts say MFIs may have no alternative but to review and recast their business model in the state.

“In order to sustain in Andhra Pradesh, MFIs need to work more on product diversification," said Anurag Agrawal, senior vice-president, investment banking group, at Intellecap, a social sector advisory firm for companies and non-profit organizations.

“The MFI model clearly, in this form, has received a setback in Andhra Pradesh... In future micro-lenders will have to adopt a different model." he added.

Some are already engaged in production diversification. Spandana, for instance has already started giving loans with gold as collateral.

“In Andhra Pradesh, we have a huge distribution network. Along with providing micro loans to customers, we are also exploring possibilities of offering customized alternative products to our target segment. We have been offering agri-loans since long and we continue to do so currently," Spandana said in its email.

Even SKS is piloting projects in housing finance and gold finance. “The pilot programme is on, we will have to present the business model to the board," said Raj.