India: AP to challenge Supreme Court relief for SKS Microfinance on resuming ops

By BV Mahalakshmi, The Indian Express

The Andhra Pradesh government has decided to challenge the Supreme Court interim relief order given to SKS Microfinance for resuming loan operations in the state. The SC order says that the company has to adhere to the Andhra Pradesh Microfinance Institutions (Regulation of Money Lending) Act, 2011, with respect to new loan disbursements, interest rates and recovery practices.

Speaking to FE, Reddy Subramaniam, principal secretary, rural development, Andhra Pradesh government, said, “The interim relief came without any notice to the state government, which is the main party in the SKS case. We could have clarified if we were informed earlier as in any special leave petition (SLP) cases. Hence, we have decided to challenge the interim relief order at the earliest.”

Reddy clarified that there was no blanket ban on the company to stop operations. “We only suggested that the company has to abide by the state regulations to carry out their operations,” he said. “We have neither arrested anybody so far as claimed by the company and not stopped them from recovering their dues from borrowers,” he said.

The state law, the Andhra Pradesh Microfinance Institutions (Regulation of Money Lending) Act, 2011, defines that no company should use any coercive methods or any mode of harassment on borrowers.

More than 80 suicide cases have been reported in the state due to harassment by the microfinance institutions due to bad recovery methods. Incidentally, the District Rural Development Agency (DRDA) had also cancelled the registration of SKS Microfinance in Mahabubnagar district for allegedly not following rules.

Recently, insurance regulator Irda also slapped a penalty of R50 lakh on SKS, which collected extra funds, apart from the premium, as a corporate insurance agent without proper disclosure to policy holders.

Recently, the Andhra Pradesh HC division bench dismissed the petitions filed by SKS and other microlenders against the Andhra Pradesh Microfinance Institutions (Regulation of Money Lending) Act, 2011. The company then moved the apex court. Also, the SC asked the AP government not to take coercive steps against the company.

India: Microfinance to the world’s poorest falls, India’s Andhra Pradesh leads drop

New Delhi: The number of world’s poorest families who received access to microcredit and other financial services declined for the first time in 2011 over the previous year and India accounted for almost all of the reduction, a report has said.

According to the state of the latest microcredit summit campaign report, in 2011, microfinance providers reached fewer people living in extreme poverty than they did in 2010.

This marks the first time since the campaign started recording Institutional Action Plans in 1998 that both the total number of clients and the number of poorest families reached declined from one year to the next, the report said.

India accounts for almost all of the reduction in clients worldwide, the report said. In 2011, there were 14 million fewer poorest clients in India than in 2010.

“Most of these reductions come from Andhra Pradesh, where fast growth led to overlending, cases of harsh collection practices, and heavy regulation from the state government.

Many MFIs and banks stopped lending to microfinance clients and self-help groups as a result,” the report said.

Moreover, there is investor wariness as banks and other investors in India and other countries curtailed their investments in microfinance.

In order to be more effective, microlenders should tap the potential benefits of technology, which in turn is likely to cut costs, improve client privacy, bridge physical distance and improve quickness of loan disbursement.

A survey of more than 147 developing countries found that 1.7 billion people do not have a bank account but do have a mobile phone.

“If we want to provide financial services in a way that helps people move out of poverty, then we need to provide things that cannot be stolen. We need to provide products and services that help people living in poverty to address the many areas of vulnerability that they face, so that their hard-earned gains are not taken away by disaster and disease,” the report said.

International microfinance investment vehicles however, continued to invest almost three-quarters of their funds in Eastern Europe and Latin America, regions with less outreach to the poorest.

There was an acceleration in sub-Saharan Africa which saw an addition of 1.4 million clients, the report said.

SOURCE: The Financial Express

India: Life after microfinance in AP

G. Naga Sridhar, The Hindu Business Line

How is life for the poor without microfinance?

This question bothers many experts in Andhra Pradesh, where fresh loan disbursals by Microfinance Institutions (MFIs) have all but dried up over the last two years.

It was in October 2010 that the State Government brought in the Andhra Pradesh Microfinance (Regulation of Moneylending) Act, unleashing a turbulent period for the Rs 33,000-crore microfinance sector.

Even as the MFIs appear to be breathing easy now in relative terms, the crisis and its aftermath throw up pertinent issues on the so-called inevitability of microfinance as a tool for growth and empowerment of the poor. Have the poor suffered?
One side of the argument

The industry and Microfinance Institutions Network (MFIN) have been maintaining that poor women clients in the State have now fallen victim to private moneylenders.

A recently released report of MicroSave (Market-led Solutions for Financial Services) claims that MFI clients have taken loans from moneylenders to bridge the credit gap, post October 2010, and also reduced the scale of their businesses due to non-availability of working capital.

The study is based on participatory methods and was done during July-August 2011. It also shows a discernable industry-friendly tilt and concludes that moneylenders increased lending between October 2010 and July 2011 in the areas with higher penetration of MFIs.

Not surprisingly, leading MFIs have readily subscribed to MicroSave report, advocating the need for speedy normalisation of things and annulment of the AP MFI Act.

SKS Microfinance has referred to a substantial portion of the report in its annual report for 2011-12, highlighting the key findings.

But some critical questions on the scientific nature of the report still remain unanswered.

First, MicroSave tried to capture the situation during the first eight months of the crisis during which other interventions for higher credit supply did not take off.

In the last one year, credit flow from Government-driven sources has gone up significantly.

So, the report and its conclusions may not represent the prevailing ground-level realities.

Second, the study does not define the purpose of loans, when it says borrowing from moneylenders had gone up. You could take a loan for a variety of purposes. But any discussion on the efficacy of microloans should only be seen in terms of loans for productive purposes.

Even the Reserve Bank of India’s Malegam panel observed that only a little over quarter of MFI loans were used by the clients for productive purposes. So, if the poor are taking loans from moneylenders for other purposes, it’s an altogether different issue.

Finally, dependence on participatory methods involving group discussion in a crucial study such as this is not universally accepted. It should have been empirically sounder.
THE OTHER VIEW

Now, let’s see the other side. The State government does not see any sudden rise in money lending activity post October 2010.

According to Reddy Subrahmanyam, Principal Secretary, Department of Rural Development, studies commissioned by the Government showed that the share of private moneylenders in rural credit market in the State has remained unchanged at about 30 per cent in the last two years. It maintains that credit availability has increased substantially through bank route with an addition of over Rs 1,000 crore in the last one year.

Another upcoming source is Sthreenidhi, a credit cooperative for women in Self-Help Groups, popularly labelled as microfinance bank. It had disbursed a little over Rs 400 crore till date, taking the total incremental additional credit to the poor to about Rs 1,500 crore.

Given the fact that entire MFI loans extended earlier were not used for productive purposes, the actual credit-gap should not have been too huge and the urgent productive needs could have been met for over one crore SHG women in the State.

The credit-targets for the current year, both from the Bank-SHG linkage and Sthreenidhi, have been upwardly revised. For instance, Sthreenidhi targets Rs 1,500 crore disbursals this year.

In December 2012, the State government has also replicated the Sthreenidhi model for the urban SHGs as well.
DIFFERENT MODEL

The divergent stances of the industry and Government have one commonality — they agree to disagree. In the absence of reliable data, any final conclusion on credit-gaps and increase in incidence of moneylending is unlikely to be acceptable.

Hence, it may be worthwhile to see whether Andhra Pradesh — which has been the only State in the country without MFI loans for two years — has anything to offer to different stakeholders as a model state.

A noteworthy element is the financial and technological innovation achieved in the form of Sthreenidhi.

It promises a new microfinance model that takes people into confidence. The due diligence, sanction and disbursals are being entirely done by women.

The credit cooperative has also dispelled the notion that microfinance is intrinsically a high-cost model, especially in terms of operational costs. It gives loans at 12 per cent interest rate, including a 3 per cent profit.

This is made possible to some extent by leveraging technology at the grassroots level. Not that MFIs don’t use technology. But it is used more in their head offices.

As major MFIs are spread unevenly in various States, a region-wide analysis of operational costs may be useful in this regard. It should also be examined whether differential interest rates can be offered by MFIs in different States, taking into account variations in operational costs.

If this happens, the poor in some regions are not made to pay for the high operational costs in other regions. Banks can take note of speedy sanctioning of loans within 48 hours by Sthreenidhi.

A key factor that draws women to private microlenders is the delay in processing bank loans. If this is addressed, it may be possible to prevent some from knocking on the doors of MFIs for loans.

Finally, one question comes to mind. Has Andhra Pradesh proved that microfinance is not an inevitability, as is portrayed by the MFI lobby?

One should not forget that poor clients, who protested over high interest rates and harassment by recovery agents two years ago, are not coming out in large numbers to seek MFI loans now.

If we separate the financial inclusion agenda from empowerment of the poor through loans for productive uses, the AP model, especially Sthreenidhi, may carry more messages than what is being seen superficially.

India: Microfinance institutions drift from traditional Grameen lending model

By Namrata Acharya, Business Standard

Faced with the challenge of bank funding and stringent regulatory norms, many microfinance institutions (MFIs) are drifting from the traditional Grameen model of lending. The idea is to reduce operational cost, while maintaining low default rates. Many MFIs, especially those in the southern states, are experimenting with a monthly repayment system, rather than weekly repayment, to reduce costs. For example, Hyderabad-based Trident Microfinance and Chennai-based Equitas Microfinance have started experimenting with the monthly repayment model.

The Grameen model, dating back to 1976, stipulates weekly repayments under group lending, whereby the members of a group constantly create peer pressure for timely repayment of loans. As a result, the rate of default in most MFIs is as low as one or two per cent.

However, with margins coming under pressure and operational costs remaining high, after the crisis in the MFI sector, micro lenders are finding it difficult to continue with the weekly repayment system. Most MFIs in Andhra Pradesh, where majority of the industry was concentrated before the 2010 crisis, have substantially cut workforce at field level to bare minimum.

Recently, Trident Microfinance shifted from weekly to monthly repayment model of lending on a pilot basis in Madhya Pradesh. “The disbursement and repayment from the monthly repayment model is same as from the weekly one. It has reduced the cost as MFIs are struggling to stay afloat,” said Puli Kishore Kumar, promoter and chief executive officer, Trident.

Equitas, which had been operating on a fortnightly repayment model for lending since 2007, started monthly repayment model a year before.

At present, nearly 40 per cent of its customers are under monthly repayment schedule, while 60 per cent are in the fortnightly repayment schedule.

“We have begun offering monthly repayment options to our clients, and there had been no issues with repayments,” said P N Vasudevan, founder of Equitas. The monthly system of repayment in MFIs could reduce the cost of operations, which constitute a major expense for small lenders, by 25 per cent, said Alok Prasad, chief executive officer of the Microfinance Institutions Network ( MFIN), the representative body of MFIs.

However, the inherent risks of deviating from the Grameen model are not ruled out.

“Some MFIs are looking at monthly repayment system, as the operational cost is much lower. However, there are inherent risks in the model as the cash flows may not meet repayments. Expectation that a borrower will pay a lump sum amount of money at the end of the month can be unrealistic,” said Prasad.

India: Microfinance defaulters may find it tough to get fresh loans

By Shobha Roy, The Hindu Business Line

A defaulter or overleveraged borrower might find it difficult to get credit from microfinance institutions (MFIs).

With almost all NBFC-MFIs sharing nearly 100 per cent of the borrowers’ credit history with credit bureaus, borrowers will find it difficult to approach them for loans.

Following the crisis in the MFI industry in Andhra Pradesh, the Reserve Bank of India had, in September last year, asked all NBFC-MFIs to upload the data of their clients with any of the four credit bureaus including Cibil, Experian, Equifax and High Mark.

According to Alok Prasad, Chief Executive Officer, Microfinance Institutions Network (MFIN), close to 75 million client records have been uploaded with the two credit bureaus — Equifax and High Mark Credit Information Services Ltd.

“The first step is where the MFIs provide a data of their clients to credit bureaus; the next step is where they can take reports on specific clients to get their borrowing and repayment record. Both these steps are being followed by MFIs,” Prasad told Business Line.

There are close to 25 million borrowers in the industry.

“The higher number of records with credit bureaus is primarily because a borrower might have taken more than one loan. Some of them might not be taking credit at present but records still exist,” said Chandra Shekhar Ghosh, Founder and Chairman of Bandhan.

RBI, in its guidelines to NBFC-MFIs, had instructed that a self-help group cannot borrow from more than two MFIs and the total borrowing should not exceed Rs 50,000.

“Multiple lending and over leveraging were the two key issues that came to light following the crisis. This has been largely put in check as our lending decisions are based on the credit report,” said Shubhankar Sengupta, Chief Executive Officer, Arohan Financial Services.
Slow disbursements

Though MFIs are currently uploading monthly credit record with the bureaus, they will soon start feeding fortnightly data as well to make the system more effective, Prasad said.

The new system has, however, delayed the disbursement process a bit.

“Earlier, disbursements were made within a week but now it takes about two weeks to consult the records and take a decision,” Ghosh said.

India: Consolidation – A way forward for the MFI industry

By Namrata Acharya, Business Standard

Consolidation seems to be the way forward for the embattled Indian microfinance industry.

Recently, Intellecash Microfinance Network Company Limited, a subsidiary of the Intellecap Group of companies, bought a majority stake in a Kolkata-based MFI, called Arohan Financial Services. This was the first acquisition in the MFI space since 2010, when a sudden Legislation by the Andhra Pradesh government had led to a near catastrophe in the business of small lending in India. More than 70 per cent of the MFI industry was then concentrated in Andhra Pradesh.

As the MFI industry gradually moves on to normalcy, two big MFIs in, Share and Asmitha, are also firming up plans for merger. The MFIs are waiting for a clarity in regulations and the implementation of the Micro Finance Institutions (Development and Regulation) Bill, 2012, which was introduced in the Lok Sabha on May 22, 2012.

The combined portfolio of the two MFIs could be close to Rs 3000 crore, which would be a competition of the largest MFI in the country, West Bengal-based Bandhan, which has a portfolio close to Rs 3500 crore.

“In the present scenario, consolidation of MFIs will be helpful to attain economies of scale. For MFIs, who have large portfolio stuck in Andhra Pradesh, a collaboration will help recovery of loans. Once the Central MFI Bill is implemented, we will initiate the merger process with Asmita,” said Udai Kumar, founder, Share.

Nearly Rs 7000 crore, which is close to half of the size of the MFI industry before the crisis, has turned out as bad loans for the MFIs in the southern state. The MFIs are hopeful that the new law governing the MFI sector will help them recover the loans as it will supersede the The Andhra Pradesh Microfinance Institutions (Regulation of Moneylending) Act, 2010. The state act does not allow MFIs to recover loans from Andhra Pradesh.

“The Andhra Pradesh government is not supportive to the MFI industry. If the Central regulation comes we will be able to recover much of our loans,” said Kumar.

“Consolidation is the way forward for the MFI industry. Over the next three years we could see several mergers in the MFI space,” said Alok Prasad, CEO, Microfinance Institutions Network (MFIN).

West Bengal based Bandhan is also open to acquisition to expand its reach in other states.

“Right now we are not looking for acquisition, but there if we want to expand in a state where we are not present, we might look at the option of acquisition,” said Chandrashekhar Ghosh, founder, Bandhan.

The consolidation of MFIs would also help smaller MFIs to expand in newer geographies.

” . Post consolidation we will have a strong equity base and portfolio spread across three states – Bihar, West Bengal and Assam. It is a perfect launch pad to achieve our aim of reaching a portfolio size of Rs 100 crore by Mar 2013 and working towards crossing Rs 1000 crore in the next five years.” said Shubhankar Sengupta, CEO of Arohan.

India: Microfinance industry awaits clarity on operations, norms in new Bill

By Satyanarayan Iyer, The Hindu Business Line

The Microfinance Institutions (Development and Regulation) Bill will breathe life into the ailing sector, according to business leaders representing three different institutions.

The microfinance industry is hampered by unclear regulations and there are no clear set of guidelines for operations of the sector.

“Over the last three decades, the MFIs have had to operate under rules and regulations either meant for NGOs that did not provide financial services, or for finance companies that did not serve the bottom of the pyramid,” said a statement issued by non-profit organisation Accion.

The new Bill, which is with the standing committee of Parliament headed by former Finance Minister Yashwant Sinha, will probably be introduced in the Budget session of Parliament, according to the CEO of a leading microfinance institution.

“While specifying the RBI as the regulator, the Bill provides a role for state governments, district administrations and microfinance practitioners,” said Vijay Mahajan, Founder and Chairman, BASIX Group.

CONCERNS REMAIN

The business leaders, however, pointed out that the Bill is silent on recovery of loans aggregating Rs 6,000 crore that the Andhra Pradesh Government had waived off in 2010.

The AP Government had put stringent conditions on microfinance institutions (MFIs) for recovering the money owed to them by borrowers. The law came into force in late 2010 on the back of media reports which alleged that MFIs resorted to coercive recovery practices, which led over 200 people in the State to commit suicide.

MFIs business in Andhra Pradesh, which constituted about one-third of institutional micro-finance lending in the country, suddenly slumped after the State law came into force.

“The Microfinance Bill provides a strong legal framework covering all participants in the microfinance space, thereby increasing the confidence of all stakeholders,” said Kshama Fernandes, CEO, IFMR Capital.

LENDING RATES may not COME DOWN

The new Bill caps the lending rate at 26 per cent per annum. This is higher than banks average lending rate of 12-14 per cent.

The new capped lending rate is, however, lower than the lending rate charged earlier by MFIs, which was as high as 60 per cent per year.

“The lending rate is unlikely to come down further. If we can lend at 26 per cent, then that will be a big positive,” Ramesh Ramanathan, Chairman, Janalakshmi Social Services, said.

As MFIs get bank finance at 14 per cent interest, lending at a lower rate (less than 26 per cent) makes it unviable for them.

“India is the only country in the world, where MFIs are not allowed to raise even savings deposit from the borrowers,” Mahajan said. If MFIs are allowed to raise deposits then lending cost can be brought down to 16-17 per cent per annum, he added.

The fixed cost has been a cause of concern for most MFIs. “With inflation, fixed cost also tend to vary,” according to Mathew Titus, Executive Director, Sa-Dhan.

India: In Andhra Pradesh, moneylenders rush to fill vacuum created by MFIs

By Arvind Jayaram, The Hindu Business Line

Poor borrowers avoid banks because of delay in access to loans: Survey

This is despite the higher interest rates charged by these lenders and the loan often not covering the full requirement. But with microfinance institutions (MFIs) abstaining from new loans in the State ever since the Microfinance Institutions (Regulation of Money Lending) Ordinance in October 2010 was introduced, there seems to be no other option.

A new study by financial services solutions provider MicroSave found that 59 per cent of the people surveyed in group sessions in Telangana, Rayalaseema and Coastal Andhra covering a total of four districts said they have taken loans from moneylenders in the absence of loans from MFIs.

Moneylenders have increased lending in the past eight to 10 months in areas with higher penetration of MFIs, according to the study. Furthermore, 37 per cent of the respondents had taken loans from self-help groups (SHGs) and 29 per cent from “daily finance corporations”, another form of moneylenders.

Interest rates

In terms of interest rates, SHGs were the most accommodating lenders in the State, charging 12-13 per cent. However, the amount disbursed by SHGs was often too small to meet the borrowers’ requirement. In contrast, the MFIs used to charge 27-45 per cent annually, including insurance. But compared to pawnbrokers charging 30-36 per cent and moneylenders or direct finance corporations demanding 36-120 per cent, MFIs were still a better option.

The difficulty in securing funds has put a damper on the business plans of many rural folk in the State. While 24 per cent of the respondents said they have postponed their expansion plans because access to credit was difficult, 32 per cent said they reduced the scale of their businesses in the absence of an alternate credit source.

Another 12 per cent resorted to the sale of assets such as houses, vehicles, cattle or jewellery to meet agriculture-related expenses, besides non-productive expenditure such as school fees or marriages.

The study also found that despite a good banking network in the region, most respondents did not like to source credit from them on account of inordinate delays, cumbersome procedures and complex documentation. But when it comes to accessing credit from alternate sources, about 66 per cent of the respondents at group sessions conducted by MicroSave in the State said exorbitant interest rates were the biggest “pain point”.

Furthermore, 41 per cent said loans taken from SHGs and banks were often inadequate. In addition, the time taken for loan processing by SHGs and banks was cited as a constraint by 24 per cent of the respondents, with a minimum wait time of one month that could stretch to six months.

Inflexible mfis

In this regard, a majority of the respondents indicated that they liked some of the features of MFIs and denied being harassed by them, even though they had heard of suicide deaths attributed to harassment by MFI staff. While 80 per cent cited timely delivery of loans as the best selling point of MFIs, 26 per cent liked the doorstep-delivery model. At the same time, 39 per cent asserted that the inflexibility in loan repayments to MFIs was a sore spot, since not even a single day’s grace period was given.

Whether there is scope for MFIs to make a comeback in the State is a moot point for the time being. Almost 90 per cent of the respondents said they were willing to repay their loans to MFIs if they start disbursing new loans and other members of the community start repaying. But the repayment rate for MFI loans is very low at present, ranging between 6 per cent and 12 per cent.

Most MFI clients stopped repaying as other members of the group and community stopped repayment.

There have also been instances of wilful defaulters putting pressure on prompt payers to stop repaying their loans. What is more, the media, local activists and influential members of the community have also played a major role in encouraging borrowers to default, leaving MFIs wary of the State, says the report.

India: Microfinance Institutions Network regulator to ask RBI to fix margin cap at 12%

HYDERABAD: Microfinance Institutions Network (MFIN), a self regulatory body of MFIs, has decided to ask the Reserve Bank to fix the margin cap for individual loan to borrowers at 12 per cent, instead of 10 to 12 per cent.

MFIN CEO Alok Prasad said the body will soon be approaching the RBI with the request as the new cap will be challenging for the microfinance sector.

The interest rate cap on individual loans given by MFIs is fixed at 26 per cent.

In a circular issued by the RBI on August 3, the caps on margin were revised to 10 per cent for large MFIs (loans portfolios exceeding Rs 100 crores) and 12 per cent for less than Rs 100 crore.

The average interest paid on borrowings and charged by the MFI are to be calculated on average monthly balances of outstanding borrowings and loan portfolio, respectively, the RBI had said in the circular.

“What the industry is saying is that the earlier position of 12 per cent which was there before August 3 circular should be restored. The industry is asking to maintain the status quo ante,” Prasad told reporters here.

Replying to a query, he said post AP MFI Act, the Indian microfinance industry size shrunk to Rs 16,000 crore from Rs 26,000 crore in 2010.

“Outside Andhra, with cautious optimism, I would say the industry would grow at 25 to 30 per cent in the current financial year,” he said.

The situation is improving outside Andhra Pradesh and banks and equity participants are showing interest in the industry and funding has selectively started, he said.

On situation in Andhra Pradesh, Prasad said the logjam will only be cleared though dialogue which is yet to take place.

After witnessing a spate of suicides of borrowers allegedly due to coercive recovery practices by the MFI agents, the then AP government had come out with AP Microfinance Ordinance in October, 2010 and subsequently made that into an Act. The Act affected the activities of all MFIs leaving around Rs 7,000 bad debts in the market.

SOURCE: The Economic Times

India: Banks bullish on microfinance post AP crisis, thanks to RBI rules

By Sachin Kumar, Hindustan Times

The microfinance sector has again started witnessing a flow of funds from banks — which had become hesitant in lending to micro lenders in 2011 — encouraged by the new set of regulations introduced by the Reserve Bank of India (RBI). The new rules brought in clarity in the regulation of microfinance institutions (MFIs).

“We have had a dramatic turnaround in situation from the fourth quarter (January- March) of 2011-12,” said S Dilli Raj, chief financial officer, SKS Microfinance. “For the first nine months, all that we could access was an incremental debt of Rs. 417 crore while in the fourth quarter we were able to raise Rs. 998 crore, primarily from banks.”

Banks became cautious in lending to MFIs after the Andhra Pradesh crisis. After reports of suicide of borrowers in Andhra Pradesh (AP), the state government had come out with the AP Microfinance Ordinance in October, 2010, and subsequently made it into an Act which crippled the activities of all MFIs.

“With the promulgation of the Andhra Ordinance regulating MFIs in 2010, the industry found itself in an environment of heightened regulatory and political risks which resulted in bank funding coming to a virtual halt in 2011,” said Alok Prasad, CEO, Microfinance Institutions Network. “However, with consistent signals of support from the RBI and the finance ministry, risk perceptions have improved and in the last quarter of 2011-12, there was a significant inflow of fresh bank funds, albeit to select MFIs.”

In the second half of 2011-12, RBI said the loans extended by banks to MFIs from April 1 will be classified as priority sector lending. Also the Microfinance Bill, which makes RBI a sole regulator, has been tabled in Parliament and it is expected to be passed some time this year.

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