Will not stop sanctioned loans to MFIs, say banks

Will not stop sanctioned loans to MFIs, say banks

Mumbai: Indian banks have assured microfinance institutions (MFIs) that they will not stop disbursing already sanctioned loans, providing a breather to MFIs in Andhra Pradesh hit by recent stringent regulations.

The controversial Andhra Pradesh ordinance, yet to be legislated, seeks to check alleged coercive methods used by MFIs, who lend to low-income borrowers, to aggresively recover loans and prohibits them from taking their business to door steps, giving multiple loans to a borrower and collecting weekly repayments.

It also restricts them to receive repayments at local village council offices only once a month.

The change in rules have begun impacting MFI operations in the state, forcing many to stop fresh lending.

Some banks, too, have stopped issuing fresh loans to MFIs in Andhra Pradesh.

“Banks have assured that they will disburse all sanctioned loans. To issue fresh loans, they are eagerly watching the situation" said Vijay Mahajan, president of Micro Finance Institutions Network (MFIN), an industry lobby.

“We have assured them that the situation will improve over the next few days."

In separate meetings early this week at State Bank of India, the country’s largest lender, and at Indian Banks Association (IBA), the national bankers’ lobby, senior bankers met MFIN officials to take stock of the situation.

Indian banks have an exposure of around Rs27,000 crore to MFIs in Andhra Pradesh, according to MFIN.

Small Industries Development Bank of India, ICICI Bank Ltd and State Bank of India have large exposure to MFIs in the southern state.

In the IBA meeting held on Tuesday, banks sought an assurance from MFIs that their loans to such firms do not turn bad and they will continue to issue loans to their clients in the state.

Bankers who met MFIN officials included State Bank of India chairman O.P. Bhatt, Bank of Baroda chairman M.D. Mallya, HDFCBank Ltd managing director and chief executive Aditya Puri, Bank of India chairman Alok Misra and Punjab National Bank chairman K.R. Kamath.

Mint reached out to a few of them, but none were willing to comment on the matter formally.

“We have told MFIs that they should ensure that no defaults (to bank loans) happen regardless of the problems happening in the sector," a senior banker who attended the meeting said, requesting anonymity.

MFIN had challenged the ordinance in Andhra Pradesh high court, saying MFIs are under the regulatory purview of Reserve Bank of India and the ordinance could impact the operations of the industry in the state.

The high court on 22 October allowed MFIs to resume business, but directed them to register their activities with the state government within a week.

Following the interim orders issued by the high court responding to the petitions of MFIs, Andhra Pradesh government, in a 29 October notification, provided a couple of breathers to MFIs.

The government gave 15 days to these firms to complete registration as against one week provided in the ordinance, and also allowed the MFIs to submit returns to state authorities detailing the business conducted once in a week, instead of once in every 48 hours as ordered earlier.

MFIN, for its part, said on 4 November that MFIs will reduce interest rates to 24% initially to Andhra borrowers in an attempt to address a key concern of the state government.

Andhra Pradesh has the largest pie of microfinance among Indian states, accounting 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.

Sadhan estimates that the total loan outstanding of 264 registered MFIs registered with it at around Rs18,343 crore on 31 March, out of which Andhra Pradesh alone has Rs5,210.8 crore and a client outreach of nearly 6.2 million clients, followed by Tamil Nadu (4.57 million) and Karnataka (3.74 million).

Top 10 large MFIs cover nearly 76% of the total client-base and 80% of the loan portfolio, Sadhan data showed.

C.R. Sukumar from Hyderabad contributed to this story.