SKS threatens exit from Andhra

From Business Standard -

Akula urges RBI intervention, says difficult to continue if restrictive law remains.

SKS Microfinance may consider pulling out of Andhra Pradesh if the state government does not revoke its recent restrictive legislation on microfinance institutions (MFIs) by April 1.

“Until RBI (Reserve Bank of India) steps in and does something on the AP Act, we are going to see some uncertainty. The committee (Malegam panel, which recently gave a report on the issue to RBI) has given seven reasons why the state government should not have its Act. The committee has also said April 1 is when it would like to see these recommendations in place,” said Vikram Akula, chairman of SKS Microfinance.

“However, in case the situation does not get resolved, we may have to severely downsize our exposure in Andhra Pradesh or even, in the worst-case scenario, consider pulling out of the state,” he added.

Andhra Pradesh accounts for 24.5 per cent of the portfolio of SKS Microfinance, which was around Rs 5,000 crore as on December 31, 2010. Since the controversy over high rates charged by MFIs and the new law broke out late last year, the recovery rate of SKS in the state has dived to 42 per cent as against the rest of the country’s average of 98 per cent. The state also accounted for 70 per cent write-offs and provisions. For Andhra, the latter totalled Rs 58 crore as on December 31, he said.

“Even considering the worst-case scenario (pulling out from Andhra Pradesh), where there were significant losses, we would still be left with a strong and well-capitalised balance sheet. We still have strong operations in 18 states,” Akula said. “We have no cash flow issues. Despite the turmoil, we have been able to make all repayments to banks. On Thursday, the Reserve Bank of India, because of certain allowances on provisioning norms, has encouraged banks to continue to lend. We see continued support from our bankers.”

Last year, the Andhra Pradesh Assembly, in a bid to regulate MFIs, approved an ordinance that curbed operations of MFIs. It took effect in October 2010 as the AP Micro Finance Institutions (Regulation of Money Lending) Act and imposed stringent regulations in response to complaints over high interest rates and dodgy loan recovery practices.

Additionally, it curtailed the activities of MFIs in the state, which has been their largest single market in India.

The Microfinance Backlash

by Jacob Goldstein, NPR -

These are tough times for microfinance.

Politicians in some developing countries are encouraging borrowers not to repay their loans. And a few studies have cast doubt on the benefits of lending small amounts of money to very poor people — a practice that has long been held up as one of the most promising ways to help people work their way out of profound poverty.

The scrutiny has been particularly intense in India recently (see coverage in the NYT, FT and WSJ), but there have also been tensions from Bangladesh to Nicaragua.

I spoke recently with David Roodman, who is writing a book on the history of microfinance, and who gave me his take on what’s going on. A few key points from that conversation:

* The founders of a for-profit microlender in India made tens of millions of dollars when their company went public last year.

“It was in all the local newspapers how rich these people were getting,” Roodman told me. “That had an important psychological and political impact. … They’re making all this money off poor people. You can imagine how that plays.”

There was also a rash of suicides last year among microfinance borrowers. And leaders in the state of Andhra Pradesh saw microfinance threatening a form of community-based savings groups that they supported.

In response, Andhra Pradesh passed a new series of regulations that will have the effect of shutting down microlending in the state, which has been a major center of microfinance, Roodman said.

This is part of a broader debate about the place of for-profit companies in microfinance. On a Planet Money podcast last fall, Muhammad Yunus, the father of microfinance, argued that if you have investors who expect profits, you’ll ultimately turn into something more like a loan-shark than a do-gooder.

Vikram Akula — one of the people who made lots of money in a microfinance IPO last year — argued that raising money from profit-seeking investors is the only way to spread microfinance quickly around the world, and will benefit the poor.

Roodman suggested that the debate may yield more for-profit companies that limit the profits they take, and cap the pay of senior officials. Some companies are already developing this model, he said.

* New studies found limited benefits for microfinance borrowers. One study of borrowers in India reported, among other things, that “No evidence was found to suggest that microcredit empowers women or improves health or educational outcomes” for their families.

The studies may have been too brief to show the benefits of the loans. Follow-ups will track borrowers for three years, which should be a better measure. “If they get similar results at three years, I think that’s very strong,” Roodman said.

* “Credit is just dangerous. It’s like a drug … and microcredit is not exempt,” Roodman said.

All kinds of credit — whether it’s mortgage lending in the developed world or microcredit in the developing world — tend to go through cycles.

Banks lend more and more money, to riskier and riskier borrowers. Eventually, lots of people fail to pay back their loans and there’s a crisis.

Microfinance bubbles in Bosnia, Morocco and Nicaragua all popped around the time of the global financial crisis, Roodman told me.

* Muhammad Yunus, who won a Nobel Prize in 2006 for his work in microfinance, has run into political trouble in Bangladesh, where he created Grameen Bank. This story from the Economist explains the details.

Roodman says the troubles in Bangladesh are less severe than the troubles in India, and aren’t likely to have a major effect on the fate of microfinance there.

* So what’s going to happen to microfinance?

“Microcredit had this magical glow to it,” Roodman said. “It’s gone away, and that’s healthy. But you wouldn’t say that just because of the mortgage crisis, we shouldn’t have mortgages.”

Tightening of lending standards and a broad pullback may be coming, but microfinance will certainly persist.

At the same time, other forms of finance for the poor may become more popular among funders, Roodman says:

Almost all money that’s going into microcredit is socially motivated.  … It could be that a tipping point has been reached when the World Bank and others will say, “You know what? The feel-good aspect is gone. We’ll put our money elsewhere.”

* Using technology to encourage savings may be the new, new thing. Some of the money that has previously gone into microfinance may now go toward figuring out ways (cell phones; atms in poor villages) for very poor people to save money in the formal banking system.

The Gates Foundation’s Financial Services for the Poor program, for example is all about savings. “They don’t want to go near credit,” Roodman says.

Microfinance companies continue to face tough time in AP

In India, microcredit faces uncertainty

From Myanmar Times -

NAGARAM, India – Her sobbing can be heard throughout her village, Nagaram, in the Indian state of Andhra Pradesh.

When visitors from Hyderabad, the state capital, some 80 kilometres away, cross the threshold of her bare little house, Narsama Anthaiah flings herself prostrate and wailing onto the dirt floor to touch their feet. Her theatrical grief is heartfelt. Two months ago her husband, aged 40, drowned himself. The Andhra Pradesh government blames unlikely villains: microfinance institutions (MFIs), which have been expanding fast in the state.

Microcredit – small loans to the poor, ideally to start a tiny business – has until recently been seen as one of best hopes for the three-quarters of Indians who still live on less than US$2 a day. But the political fallout from such deaths has put paid, at least for now, to the industry’s expansion. It could even destroy it altogether in Andhra Pradesh, and conceivably beyond.

The blame the MFIs shoulder is unfair. Farmer suicides are lamentably common in India. Anthaiah took his own life as a payment loomed on a 15,000 rupee ($333) MFI loan. Heavy rain had waterlogged his cotton crop and left the family struggling to pay the interest rate of 36 percent a year. But the couple, who had borrowed to build this house, also owed $752 to a local moneylender, who charged over 50pc.

Even so, Anthaiah’s name features on a government list of 85 MFI “victims” who had taken their own lives by November 16. The government has reacted by introducing an “ordinance” forcing MFIs to change their practices – cutting interest rates, changing from weekly to monthly repayments. Opposition politicians, scenting votes, have encouraged borrowers to default. Not surprisingly, recovery rates for some lenders have plunged from close to 100pc to around 20pc.

This is a huge problem for Indian microcredit. Andhra Pradesh is not so much the jewel in its crown as the crown itself. The country as a whole has seen a spurt in microcredit, overtaking Bangladesh, the global movement’s fountainhead. AP accounts for at least half India’s total, with more than 25 million borrowers, up from 8 million in 2007. The MFIs’ success in Andhra Pradesh is the source of their present troubles.

In Godhumagudu, not far from Nagaram, Laxmi Peta is mourning her 16-year-old daughter Lalitha. The family ran up $1460 in debts from five MFIs to pay for the wedding of their elder daughter. Unable to meet a payment, they went away to seek help from the new in-laws, leaving Lalitha alone. An MFI officer arrived, along with the village head and the four other members of her mother’s “joint liability group”– fellow villagers who had taken collective responsibility for the debt. After their harangues, Lalitha drank pesticide. Her mother treasures a tattered suicide note. It advises her not to take out any more loans, except for her young son’s education.

The MFIs are less abusive and far cheaper than traditional moneylenders. Their troubles in Andhra Pradesh stem from a mix of institutional rivalry, politics and ideology.

Among the MFIs’ biggest critics is Budithi Rajsekhar, boss of the Society for Elimination of Rural Poverty, an arm of the state government formed in 2000 to run its own microcredit program. Set up with World Bank money, this involves a network of “self-help groups”, each of 10-15 women, who pool savings and then have access to bank finance. According to Mr Rajsekhar, there are now about 1 million groups, with 10 million members, covering 8m-9m households, or 95pc of the state’s rural poor. The MFIs “poach” their clients for their smaller, five-member, borrowing syndicates, and “dump” unneeded loans on them.

The antipathy is mutual. For the MFIs, the government’s groups offer too little credit, too late. The MFIs offer an alternative to the old-fashioned usurer. But their success in Andhra Pradesh has made them a political target – large numbers of voters owe them money. The opposition Telugu Desam Party lost power in 2004 partly because it was seen as in thrall to the IT industry and foreign investors. Championing poor MFI borrowers was a cost-free way of burnishing its credentials with the rural poor.

Ideologically, many in India worry that large MFIs have become for-profit firms. The biggest, SKS, was launched by Vikram Akula as a charity, with (according to his divorced and embittered wife) donations from the guests at their lavish wedding. In July it floated on the stock exchange. The issue was 13 times oversubscribed and valued the company at $1.5 billion. It has a star-studded share register and board of directors, and a great appeal for those who like to think you can do well by doing good.

But even charitable microcredit is less fashionable than it was. Other countries’ microlenders have also had crises. In Pakistan’s Punjab province, it became fashionable in 2008-09 for politicians to encourage borrowers to default on microloans. And earlier this month the movement’s patron saint, Muhammad Yunus, a Bangladeshi economist and Nobel laureate, was cleared of allegations of diverting Norwegian aid money from one arm of his Grameen Bank to another.

The film making the accusations also aired arguments that microcredit may do more harm than good. Research suggests that it does work – for some people some of the time, as you would expect. It is not a magic bullet, but nor is it intrinsically harmful.

In Nagaram, where Mrs Anthaiah still has to pay off the moneylender with only her own labour to sell, her self-help group is arranging a loan to tide her over. India’s problem is not too much microcredit, but too little, too narrowly directed. – The Economist

Andhra Pradesh law to curb microfinance firms comes into force

From Business Standard India -

The Andhra Pradesh Micro Finance Institutions (Regulation of Money Lending) Act, 2011, which aims at curtailing coercive practices by microfinance institutions, has come into effect from on Saturday.

Governor E S L Narasimhan gave his assent to the Bill yesterday. The Bill was passed by the Legislative Assembly on December 14 and the Legislative Council the next day.

The state government had brought in an ordinance on October 15 following a spate of suicides by borrowers of MFIs. The ordinance was later replaced by a Bill, which was passed last month. Minister for Women Welfare V Sunita Laxma Reddy had told the Assembly that 75 women committed suicide, unable to bear the coercive practices adopted by MFIs to recover loans.

The government also contended that the MFIs charged extremely high rate of interest. By their own admission, some MFIs, while registering with the District Rural Development Agency said they charged 50 to 60 per cent interest.

The Act makes registration of all MFIs mandatory. The state government, in consultation with the Andhra Pradesh high court, may establish a fast-track court in each district for settlement of disputes of civil nature between borrowers and MFIs.

The government, in the representation to the Malegam Committee, said some MFIs adopted strong arm tactics for recovery. It also proposed an eight per cent cap on the interest rate spread on the interest rates being charged by the MFIs.

It said the roles of MFIs should be limited to areas or households that are facing financial exclusion. It said the MFIs should not be allowed to go for IPOs as it would shift the focus of MFIs on profit generation only. It also said private equity players invested in the MFI sector due to the high returns while there was a need to promote social investor and rope in corporates as part of their corporate social responsibility.

Going grameen in a typical micro-Indian way

By M Rajshekhar, Economic Times India -

The year 2010 was not good for Microfinance Institutions (MFIs). They entered the year on a high. Growth rates were dizzying. Players were readying to raise money from capital markets.

The segment was getting hosannas for being virtually the only financial intervention by the formal sector that reached the poorest of the poor. And now, as 2010 roils to a close, the MFIs are staring at heavy losses in its largest market, Andhra Pradesh, an uncertain regulatory future, and a greatly tarnished image.

What went wrong? The year began poorly for the MFIs with the RBI deputy governors telling that that the central bank was aware of the extent of benami loans being given by MFIs, the practice of writing off bad loans and sloppy corporate governance in some of the entities. That was in January.

A couple of months later, the concerns over corporate governance were heightened when the SKS Microfinance management sold all their shares (with the exception of unexercised options) before the IPO. And they were heightened further when the MFI fired its CEO, Suresh Gurumani, less than two months after its successful IPO. The resulting fracas hammered the SKS scrip, and raised further questions about the quality of corporate governance in the company.

Around the same time, papers and TV channels in Andhra Pradesh began reporting that women who had borrowed from MFIs were killing themselves. After 2005-06, when there had been similar reports of suicides amongst MFI borrowers, this was the second such outbreak.

This raised questions about the MFIs’ conduct with borrowers, and about their due diligence before proferring loans. One fact will suffice. It has been known for a while that the Andhra market was overheated.

Microfinance loan penetration amongst poor households was an incredible 823%, as per the industry’s own 2009 State Of The Sector report. Despite that, in 2010, the registered MFIs lent a total of Rs 9,000 crore — up from Rs 5,000 crore-Rs 6,000 crore the previous year.

Rival political parties saw this as a chance to humiliate the ruling Congress party. The state bureaucracy, which runs its own SHG programme and consequently has an adversarial relationship with the MFIs, drafted an ordinance imposing onerous conditions on the MFIs.

And the Congress, partly out of conviction and partly out of the need to respond to the opposition, overrode protests by the Centre and passed the ordinance. Since then, collections have plummeted in the state. Estimates suggest they are as low as 10%, from the initial reported 99%. Bank lending is down. Equity investments have all but stopped. The finance ministry is awaiting the RBI’s YH Malegam committee report before finalising a bill for regulating microfinance.

In recent years, the MFIs lost their way, focusing far more on credit delivery than on helping people escape poverty. Hopefully, in 2011, we will see the return of a form of microfinance that the village women appreciate. At this time, they are conspicious by their silence even as the AP government cracks down.

MFI loans slow to a trickle in AP

Banks wary of microfinance institutions, would rather lend to self-help groups

By Neelasri Barman, Daily News & Analysis -

After burning their fingers with microfinance institutions (MFIs), banks plan to speed up lending to self-help groups (SHGs) instead.

The view changed after collections by MFIs in Andhra Pradesh deteriorated considerably and there were initial signs of the contagion spreading to other states.

An SHG is a group of around 20 people who come together voluntarily and make savings of small amounts regularly. The saved money is used to provide loans with an interest to the group members.

Once the SHG gathers some stability, it gets linked to a bank, which starts providing credit to it. This is called the SHG-bank linkage programme, after which the SHG becomes accountable for repayment of the loan to the bank.

“We are going through a time when we feel more comfortable in lending to SHGs rather than MFIs. Earlier, we used to lend to MFIs who in turn used to lend to these SHGs at very high rates of interest, which were 25-30% per annum. But as a bank, we can lend to them at rates as low as 13-14% per annum,” said T R Bajalia, executive director, IDBI Bank.

The RBI too wants banks to step up lending to SHGs, though it has also asked them to the need for maintaining funding lines to MFIs on merit, to prevent contagion.

Further, banks are more comfortable lending to SHGs as the recovery rate of loans disbursed to them is far better than those disbursed to MFIs.

“As on date, we have lent Rs2,023 crore to SHGs and exposure to MFIs is only Rs73 crore. By the end of this fiscal, lending to SHGs will touch Rs2,200 crore and lending to MFIs will touch Rs80 crore. This is because the recovery rate in SHGs is 99.5% compared with a recovery rate of around 95% in MFIs,” said T M Bhasin, chairman and MD, Indian Bank.

And it’s not just the SHGs, but also individual farmers and micro-enterprises in villages that the banks are lending directly to rather than to MFIs.

“The transaction costs of MFIs are very high… We go for lending directly by way of business correspondents and this also helps us keep the costs low,” said N Seshadri, executive director, Bank of India.

What is the impact on microinsurance of the microfinance crisis in Andhra Pradesh?

By Bernd Balkenhol, Director, ILO’s Social Finance Programme -

The microfinance industry suffered a serious crisis in the Indian state of Andra Pradesh in recent months, resulting from a combination of factors, including overindebtedness among low-income households and massive growth of microfinance institutions (MFIs). The success of the MFIs has attracted more players, both formal and informal, to lend to poor households, with few checks and balances in place. Consequently, some operators engaged in aggressive debt collection practices that have attracted significant media and political attention.

What does this mean for microinsurance? There is good and bad news. On the good side, this crisis creates an opportunity to raise the profile of insurance. Since this situation has emerged in part due to the vulnerability of the target group, insurance would be an appropriate means for them to manage some of their risks. Similarly from the supply side, the crisis exposed the shortcomings of a microfinance business model that only delivers a single rigid product. Low-income households need more than just credit.

Microinsurance also doesn’t have the same issues regarding collection practices that microcredit faces because the risk relationship is reversed. With a microenterprise loan, the lender is taking a risk that the borrower will not repay; whereas with insurance, by paying a premium up front, the policyholder is taking the risk that the insurer may not fulfill its side of the bargain.

As microinsurance is evolving to be distributed by a range of delivery channels, it is becoming less dependent on MFIs to extend insurance to low-income households.

But MFIs remain an important distribution channel, which is where the bad news begins to kick in. As they both involve the provision of financial services to the poor, microinsurance will always be associated with microfinance, and therefore any negative perceptions of the lending practices will tarnish insurance as well.

The crisis in Andhra Pradesh highlights the need for more controls within MFIs and by the regulatory bodies. Microinsurance can help the industry recover from the crisis and evolve to better meet the needs of lowincome households by providing a greater diversity of available financial products and protecting households in times of crisis. But insurers would be wise to thoroughly assess prospective delivery channels to ensure that their partners’ good reputations are well deserved.

The Full Newsletter

Incofin Invests in Hope Microcredit

By Madhav Chanchani, VCCircle -

Kerala-based Hope Microcredit Finance Ltd. has raised Rs 10 crore from  in what will be the first (disclosed) private equity investment in the Indian  microfinance sector after the crisis started in Andhra Pradesh.

The funding, raised from Belgian investment firm Incofin Investment Management’s Rural Impulse Fund II, will be the first deal in the sector since August this year.

Hope Microcredit, which started as an NGO in August 2005 and then registered as a Non-Banking Financial Company (NBFC), started its microfinance operations in April 2010.

Since then it has built up a base of 80,187 clients across of 42 branches with a loan book of Rs 25.94 crore or $5.8 million. The company, headquartered in Palakkad district, has operations in the state and bordering districts of Tamil Nadu besides the Andaman Islands.

The last deal in the MFI sector was announced on August 31, 2010, when Pune-based Suryoday Microfinance raised Rs 21 crore from Lok Capital and Aavishkaar Goodwell, according to VCCEdge.

“We are overall optimistic on the growth of this sector. The regulatory issues Indian microfinance is facing are very natural in the growth of sector. We have been saying for the past nine months    that this is bound to happen and therefore have not invested in any of the larger MFIs and backed MFIs who have focused primarily on rural areas,” said Aditya Bhandari, Private Equity Expert at Incofin, who looks after the India portfolio. He says that being an international fund Incofin has seen such issues coming up in markets like Bosnia.

The deal would be the fourth investment of Incofin in India. The firm has focused on MFIs with a rural focus with its most recent investment was Rs 4.5 crore in Fusion Microfinance, a start-up with operations in Uttrakhand, New Delhi, Madhya Pradesh and Uttar Pradesh. Other investments include Rs 10 crore in Karnataka-based Grameen Koota and a 34% stake in North-East based Asomi Finance.

Incofin is currently raising Rural Impulse Fund II, which is targeting a final close of Euro 120 million (approx $158 million) soon. The fund made a first close of Euro 86 million (approx $113 million) in June this year.

“In addition to the well established social value that Hope Microcredit has developed via various development programs, the parties have agreed to a meticulous implementation of best practices   in the area of transparency and client protection. It is our firm belief that this way of doing microfinance business represents the right way to achieve social goals and will at the same time generate fair investment returns”, says Geert Peetermans, Chief Investment Officer of Incofin Investment Management.
Indian MFIs have raised more than $450 million across 66 deals from private equity investors since 2006, according to VCCEdge. But the AP Ordinance, which besides putting restrictions on activities of MFIs has also sought barring them from raising funds PEs and capital markets, put a stop to investment activity. Most of the large MFIs are like SKS Microfinance, Spandana Spoorthy, Share Microfin are headquartered in Andhra Pradesh.

In this backdrop equity funding and loans from banks have dried up for the sector though some positive news has been coming in the last few days. Grameen Foundation and its affiliates, Grameen Capital India and Grameen-Jameel Microfinance Ltd., announced guarantee funding for Indian MFIs. The facility of $8 million could be expanded to $16 million. Also, an Economic Times report said that banks are expected to meet Reserve Bank of India to resume consortium based lending to the sector which will diversify risks.

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