PremiumHaving faced loan recovery agents for the past couple of years, Pravabati Bordoloi was no stranger to strong-arm tactics. But what really shook the 38-year-old was their threat to take away her tin roof, forcing her to take on more debt to repay existing loans.
A helper at an anganwadi centre at Rohdhola village in Nagaon district of central Assam, about 110km east of Guwahati, Bordoloi took a loan of ₹20,000 from a micro-finance institution (MFI) in 2018 to buy tools and equipment for her husband, a craftsman. Some 19 other women from the locality took loans—Bordoloi was among those who failed to repay on time.
“They offered us a loan and took our signature on papers. Who does not want money? We are poor people, we always require money," she said, adding that along with several other women, she approached a local organisation seeking help against repeated harassment.
What began as a local movement against the harassment of borrowers in Upper Assam led to the state’s BJP government passing a bill in December 2020—Assam Microfinance Institutions (Regulation of Money Lending) Bill, 2020—that is seen by the microfinance industry as an overreach. The Bill aims to rein in MFI operations in the state. A few provisions of the bill include restrictions on the deployment of collection agents, coercive collection practices and door-to-door collection; collection only at gram panchayat offices or designated places suggested by the deputy commissioner; and no more than two lenders per borrower, among others.
A key factor in the action against MFIs is the upcoming state elections in Assam. Assam’s finance minister Himanta Biswa Sarma was quoted by the Indian Express as saying on 30 December that of all the laws the government has passed in the last five years, “this Bill is the best piece of legislation and we are dedicating it to the women of Assam."
It’s not surprising this issue has become politically charged with both the ruling party and the opposition promising more relaxations to borrowers. “If we form the next government, we will completely waive MFI loans of our rural women," Ripun Bora, president, Assam Pradesh Congress Committee, told Mint.
There’s been an immediate impact on MFI collections in Assam. The first thing that happens when a waiver is announced or a rumour makes the rounds is this: regular borrowers stop repaying in expectations of being granted a similar benefit. Bandhan Bank, the lender with the largest portfolio of micro loans in Assam, witnessed a 10-percentage point reduction in collection efficiency between the end of December quarter and 1-16 January.
This has also brought back memories of the devastation on MFIs when a similar bill was passed in Andhra Pradesh in 2010. The rate of growth in MFI loans dropped to 13.15% in 2010-11, from 56.08% in the previous year. However, industry watchers feel the Assam bill is milder in comparison. “The AP bill almost made it impossible for MFIs to operate in the state but that is not the case with this one," said P. Satish, executive director, Sa-Dhan, an industry body comprising 225 microfinance institutions across India.
On the brighter side, the bill has brought the Reserve Bank of India’s focus back on a long-standing demand of the industry: parity in regulations between non-banking financial company (NBFC)-MFIs and banks. In fact, Satish believes that RBI’s decision to look at this regulatory grey area (on 5 February, the central bank said it will look at a uniform framework for all microfinance lenders) would discourage other states from passing similar legislations.
Ground zero
The Assam MFI crisis story is that of over lending, experts say. Add to that exorbitant interest rates going all the way to 27%. These loans, significantly higher than the repayment capacity of borrowers and expensive too, began turning delinquent as two major events unfolded.
The first blow came from the central government’s decision to implement Citizenship Amendment Act and National Register of Citizens, while the ongoing covid-19 pandemic only made things worse. The pandemic has left millions jobless, crimping their ability to repay debt. Experts say borrowers in Assam who had taken loans beyond their wherewithal were already on the precipice of delinquency.
The state has many cases of borrowers exploited by lenders in order to grow their loan books. Take Swapna Hira, 40, who kept taking on more debt to repay existing ones and fell into a classic debt trap. The street-side tea stall owner now makes ₹150 per day and took a loan of ₹10,000 in 2018 from a bank and then another ₹15,000 from an MFI.
“Initially, my daily profit from the tea stall was in the range of ₹200-250. But with new tea stalls coming up in the vicinity, my income crashed. I was unable to repay my dues to both the lenders and I had no proper idea of loan repayment, not even the rate of interest", said Hira, lamenting that her husband had to take more loans to repay these and finally sold a parcel of land to settle dues.
Experts have pointed out that demographically, people in northeastern states are somewhat more consumerist in nature, happy to take loans when it is easily available to spend on conspicuous consumption. This, and the lack of knowledge on the nitty-gritties of a loan contract, have been, to an extent, exploited by lenders who sniffed opportunity especially in rural areas.
Sunil Kumar Saikia, a former director of the Indian Institute of Entrepreneurship (IIE) in Guwahati, feels there has been blatant violation of RBI guidelines in Assam’s rural areas by a majority of MFIs.
“It is really painful when you have frequent news of MFIs’ alleged atrocities on people taking loans in rural areas. Before providing loans, the MFIs should have come forward with clarity on loan repayment and rate of interest. But the majority of rural poor who took loans are unaware of the interest burden," he said.
The gross loan portfolio of micro lenders stood at ₹1.96 trillion as on 31 December, with an average ticket size of ₹33,227. The state of Assam contributes to about 6% of that portfolio, at ₹12,000 crore, according to estimates by Emkay Research. Some of the major lenders there are Bandhan Bank ( ₹6,586 crore), Arohan Financial Services ( ₹930 crore), Ujjivan Small Finance Bank ( ₹417 crore) and Satin Creditcare ( ₹376 crore), according to Emkay.
The political edge
The first signs of unrest about MFIs were seen in the Upper Assam district of Dibrugarh in 2019 and spread to neighbouring districts, gaining momentum. The primary grouse was the steep interest rates charged by these lenders and harassment faced by borrowers. In December 2019, there were rumours of the state planning to waive off loans and even customers who were repaying in regular intervals began defaulting.
Taking these into account, the government finally reached out to MFIs, asking them to offer a rehabilitation package to delinquent borrowers or whose loans were overdue by 90 days or more.
Announced in March 2020, the Bihu Aarthik Swaavalamban was meant to offer easier repayment terms to women borrowers and led to a gradual improvement in collections for MFIs. However, the country soon went into a covid-19 lockdown and the RBI had to announce a six-month moratorium to stressed borrowers. Repayments were once again halted.
Manoj Nambiar, chairperson, Microfinance Institutions Network (MFIN) says Assam was the third-best state in India in terms of portfolio quality as of September 2019. This has certainly deteriorated. Nambiar is also the managing director of Arohan Financial Services, which has a significant presence in Assam and 19% of its overall loan portfolio originating from the north-eastern state.
Local political associations came into the picture too, realising that involvement in such a movement could give them traction amongst voters. For instance, Congress’ Bora, a member of the upper house of parliament and a former minister, alleged that at least three women in rural Assam have committed suicide due to recovery harassment. He said the Congress will include the issue of loan waiver in its election manifesto.
This talk of loan waivers has perturbed micro lenders. According to Satish of Sa-Dhan, after the Congress promised a loan waiver, the BJP also declared its intent. “But there’s nothing beyond that and it has not been reiterated. We are not sure whether it was just a casual comment or if it will form a part of their formal election manifestos," said Satish.
Amiya K. Sharma, executive director of Rashtriya Gramin Vikas Nidhi (RGVN), an organisation engaged in promoting livelihood finance in the north-east and eastern regions of the country, squarely blamed MFIs, the central bank and the state government for the current crisis. Sharma says that some micro lenders lured villagers and imposed a high rate of interest of 24-27%, in the guise of easy money.
In a note on 5 February, Care Ratings cautioned that the deterioration in credit discipline can result in a sudden spike in delinquencies, causing further deterioration in the asset quality of the lenders in Assam. “It was in the first week of January, so when this news came (the bill), there was a confusion among borrowers on the criteria the government will set up for the loan waiver," Chandra Shekhar Ghosh, chief executive, Bandhan Bank, told analysts on 21 January. The Kolkata-headquartered private lender, however, has not responded to an email questionnaire sent by Mint.
Micro lenders on ground believe that the situation is quite fluid and will remain so till the elections are over. The drop in recoveries will have to be managed by counselling of borrowers and explaining to them that if they default, the chances of availing of more loans in future are bleak.
As a reaction to the agitation that eventually culminated into the bill, lenders have begun going slow on new loans in the state, a trend that will hit the borrowers in the long term. Active loans in Assam as a percentage of total active micro loans in India have gradually dropped from 4.09% in March 2020 to 3.91% in September 2020.
To be sure, the problem in Assam predates the MFI regulation bill. Stressed customers in the state are significantly higher as compared to the overall industry average. Portfolio at risk (PAR) of over 30 days (loans overdue by that many days) in Assam microfinance was high at 18.17% as on 30 September 2020, as against overall PAR > 30 days of 4.48% for the industry.
“We were cognizant of the stress in Assam and have already reduced our exposure and currently our portfolio is only ₹45 crore with repayments rates of 90% and above. We remain engaged with our customers as well as continue to monitor the situation on ground," a spokesperson for IndusInd Bank said in an emailed statement. IndusInd Bank had a micro loan portfolio of ₹23,008 crore as of December 2020.
Regulatory disparity
When it comes to micro loans, banks enjoy a regulatory arbitrage over entities that are classified as NBFC-MFIs. The latter lenders are typically referred to as microfinance institutions and are strictly regulated by the central bank.
Regulations include restricting the overall indebtedness of a borrower at ₹125,000 and specifying that the interest charged should not exceed 10 percentage points over its cost of funds. For MFIs with loan books of less than ₹100 crore, the spread could be a maximum of 12 percentage points. However, micro loans by banks are not part of these norms, despite banks moving way ahead in terms of portfolio size. At present, NBFC-MFIs have a market share of 32%, while banks command a share of 42% of the micro loan segment. MFIs allege that banks are at the forefront of unchecked lending in Assam.
The issue of regulatory disparity was also highlighted by RBI deputy governor M. Rajeshwar Rao in his speech on 6 November 2020. Rao had pointed out that the regulatory rigour is applicable only to a small part of the microfinance sector and there was a need to re-prioritise the regulatory tools to one that is activity-based rather than entity-based, so that all institutions giving out microloans are treated the same.
“After all, the core of microfinance regulation lies in customer or consumer protection," said Rao.
Digambar Patowary is a freelance journalist based in Guwahati
