A new law being drafted to regulate microfinance entities has hit a jam. According to a report by CNBC TV18, the RBI, which was always unconvinced about its ability to govern the wide gamut of MFIs operating in the country has explicitly expressed reservations about supervising micro lenders that are not companies, through a central legislation. The central bank feels it does not have the resources or reach in remote areas, and more importantly the parliament itself does not have legislative competence in the matter. The RBI feels the government could be superseding federal jurisdiction by enacting such a law, as money lending is a state subject.
The government is expected to table the Micro Finance Institutions (Development & Regulation) Bill in the winter session of parliament, after recommendations of the Standing Committee of Finance are taken on board. The bill makes RBI the sole regulator for all micro finance institutions (MFIs) including those that are not licensed. But with the banking regulator expressing strong reservations, the legislation in its current form could be under jeopardy according to the report.
NBFC MFIs recommend that the government implement dual regulations in order to take the RBI’s concerns on board, rather than delay the passage of the bill.
Larger MFIs, or what are now notified as NBFC-MFIs are currently regulated by the RBI under the framework suggested by the Malegam Committee. But draconian state ordinances like the one passed in Andhra Pradesh (which at one point constituted a fourth of lending by MFIs) after a spate of suicides due to alleged coercive practices by micro lenders, has completely crippled operations of these companies in the state. Lenders, who are banking on geographies outside Andhra for growth, are keen that the bill is passed, so other states don’t raise a similar bogey.
“There could be a dual mechanism put in place in the legislation, whereby licensed MFIs which form the bulk of microfinance lending (90%) continue to be regulated by the RBI, while the smaller players come under state purview, or are governed through some other mechanism” said Samit Ghosh, President of MFIN (Microfinance Institutions Network). “The bill mustn’t be delayed though, because otherwise it will lapse.”
A dual mechanism will also facilitate a natural consolidation of operations says Ghosh, as smaller lenders will not want to function under unfriendly state rules, and would eventually join hands with licensed players.
Over 35,000 people are pegged to have lost employment in Andhra Pradesh due to the new law according to a report in the Mint newspaper. Lenders had to take major write downs on their portfolios and an estimated Rs. 6,000 Cr worth of microfinance loans have been restructured in the last 3 years, with more recasts expected. But MFIs have gradually been showing a revival, focusing on other markets, with the country’s only listed microfinance company, SKS posting 4 straight quarters of profits.
Companies have been waiting for the new bill regulating MFIs to be passed as it will repeal the rules introduced by the state government of Andhra Pradesh, which was once a intensely penetrated market for micro lenders. But the CNBC report quoting sources says “The RBI feels that it would be appropriate to enact a model law on MFIs and give the discretion to states to adopt it.”
Whether the Standing Committee accepts that proposal, or as NBFC-MFIs are suggesting, calls for dual rules, remains to be seen.
SOURCE: Business Standard
Despite the Reserve Bank of India (RBI) now acting as the regulator of the microfinance sector, the impasse in Andhra Pradesh is continuing, with the effect that some of the micro-lenders have shut shop, while those who survived, are struggling to put their house in order.
In October 2010, the state government of Andhra Pradesh introduced an ordinance to curb micro-lending operations of private players. The new law was introduced following allegations that micro-lenders charge an exorbitant rate of interest and use coercive methods for loan recovery.
It was mandated that private microfinance companies obtain a no-objection certificate from the state government before offering fresh loans to poor borrowers. Micro-lenders were also directed not to recover money on a weekly basis.
At that time, Andhra Pradesh was the largest market for Indian microfinance companies. It accounted for nearly a third of micro-lending business in the country. The new law crippled the industry, as borrowers stopped repaying their loans and losses mounted on the books of micro-lenders. A study revealed almost a third of micro-loan borrowers turned defaulter after the new rules were introduced.
“At the ground level, the situation is still the same. Borrowers are being encouraged not to repay the loans. We are writing down our entire loan portfolio in the state. The business is no longer viable for us,” said the chief executive of a Hyderabad-based microfinance company who requested anonymity fearing backlash from local political parties.
The crisis had a cascading effect on banks which had lent money to microfinance companies in Andhra Pradesh.
In February 2011 as many as five micro-lenders – Asmitha Microfin, Future Financial Services, Spandana Sphoorty Financial, SHARE Microfin and Trident Microfin – requested banks to restructure their existing loans. Two more microfinance institutions – BASIX and SWAWS Credit Corporation – restructured their bank loans a year later. Industry analysts estimate that banks restructured over Rs 6,000 crore microfinance loans in the past three years.
However, uncertainty remains over the recovery of these loans, as some of the micro-lenders have again requested banks to restructure these loans for a second time.
“When we opted for debt restructuring, we assumed that there will be some improvements in the collection rate. But there has been no improvement at all. We have requested banks for a second round of debt restructuring as we are not in a position to start repayment,” Kishore Kumar Puli, chief executive of Trident Microfin, told Business Standard during a recent conversation.
Concerned over the crisis, RBI had formed a committee under the chairmanship of Y H Malegam in October 2010, to study issues and concerns in the microfinance sector. Hopes were raised when the central bank introduced a set of norms to regulate microfinance companies in December 2011 (which was modified a bit in August, 2012) and the Micro Finance Institutions (Development and Regulation) Bill, 2012 proposed RBI as the sole regulator of the sector.
It was believed that once the Bill becomes an Act, it will automatically repeal the rules introduced by the state government of Andhra Pradesh. However, with the Bill still pending with a parliamentary standing committee, the hopes are fading fast.
Also, doubts have been raised over RBI being the sole regulator of the sector. “As far as we are concerned, we are still being governed by the state government’s law,” said a top executive of a microfinance institution based in Andhra Pradesh.
However, officials of Micro Finance Institutions Network (MFIN), the industry body of micro-lenders, clarify that RBI is now the sole regulator for the sector. The central bank has already introduced margin and interest cap for micro-lenders, prescribed minimum capital adequacy ratio and classified micro-lenders as a new category of non-banking finance company – NBFC MFI.
“In legal terms, there are two types of microfinance companies – NBFC MFI and NGO MFI. Almost 90 per cent of microfinance business in India is conducted by NBFC MFIs and they are squarely under RBI’s regulations. NGO MFIs are currently not under RBI’s regulations but the Bill proposes to bring these companies under the central bank’s purview. In Andhra Pradesh, the state government’s Act has still not been repealed. So, it is material for microfinance companies that have operations in that state. But nationally, RBI is the regulator for the sector,” said a senior MFIN official.
Micro-lenders are now pinning their hopes on the Supreme Court that offered interim relief to SKS Microfinance and allowed it to resume micro-lending operations in Andhra Pradesh. MFIN and several other micro-lenders have now approached the apex court seeking a similar relief.
SOURCE: Business Standard
The Microfinance Institutions (MFI) in Andhra Pradesh are being driven away by the provisions of the APMFI Act and the developments that followed, according to the industry. While the largest and only listed MFI has shifted its base to Mumbai, others like Basix, Spandana, Share and Asmitha are spreading to other States in India and abroad.
The MFIs in the State clocked losses of over Rs. 6,500 crore in Andhra Pradesh following the APMFI Act, 2011 which is intended to control high interest rates, coercive collections and illegal insurance practices by the MFIs. Within a year, the operations of the MFIs in the State have come down to less than 10% besides reduction of over 30,000 staff. Companies that bore the brunt include the first listed MFI SKS and others like Share, Basix and Spandana.
“It’s ironic that we are unwanted in Andhra Pradesh but welcomed all the way from Asia Pacific to sub-Saharan Africa. Basix is working with nine countries around the world starting from Papua New Guinea to East Timor on eastern side to Cameroon, Mozambique, Tanzania and Ethiopia in Africa,” said Vijay Mahajan, founder chairman, Basix Microfinance.
“The framework of AP MFI Act is complicated, burdensome and impossible for MFIs to operate. It should be repealed at the earliest,” said Alok Prasad, CEO of Microfinance Institutions Network (MFIN).
After a turn around last quarter, SKS has shifted its head office from Hyderabad to Mumbai a few days ago and is focusing over 90% of its operations in States other than AP. Besides, the company has hired a US based international marketing firm Jack Trout for brand building. “We are back at the threshold of steady growth post our recent turnaround, and require expert counsel in ending the dichotomies/ ambiguities related to branding and positioning,” said S. Dilli Raj, CFO, SKS.
The other players, Spandana, Share and Asmitha too have almost shifted majority of operations to other States. After finding greener pastures elsewhere in India and abroad, the MFIs say that they are portrayed as villains in AP but the whole world wants them.
Repeal Act, State urged
The companies desire that some sense prevails in the State government so that the APMFI Act gets repealed at the earliest.
“After all if the United Nations wants us, World Bank wants us the IFC wants us, the Swiss wants us and the Government of India wants us, so there must be something right with us. We can’t be the villains that the government of AP is trying to paint us as,” Vijay Mahajan said.
However, the silver line for the industry is that the private equity players, who shunned the sector past couple of years, have started showing interest in the MFIs according to the industry analysts.
SOURCE: The Hindu Business Line
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.
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
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.
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.
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.
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.
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.
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.
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.
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.