Andhra Pradesh tells Malegam panel to thwart microfinance IPOs

Andhra Pradesh has taken strong objection to the microfinance companies tapping the capital market.

In a report to the Malegam Committee appointed by the Reserve Bank of India to study the microfinance sector, the state has said that profit-oriented investors funding microfinance institutions should be discouraged.

“The facility of attracting investment from private equity investors in the microfinance sector has opened the gates to global investors who are drawn in by the very high returns. These private equity players are not social investors and therefore drive microfinanciers to earn more profits, which defeats the very purpose of financial inclusion. There is a need to promote social investors as also rope in corporates evincing interest in social responsibility. Therefore, microfinance entities should not be allowed to go for IPOs,” the report said.

The state government, while objecting to the way microfinanciers profit from poverty, has recommended to the RBI panel to cap the spreads of microfinanciers at about 8%.

Microfinance institutions have said they borrow funds from banks at about 13% and on-lend it to borrowers at about 24%, which leaves them with a spread of about 11%.

A spread cap of 8% would mean the maximum interest rate charged would be 21%.

The members of the Malegam Committee on Thursday held discussions with the officials of the state government and met chief minister N Kiran Kumar Reddy.

During the interaction, the government officials explained the way microfinance institutions took the rural poor for a ride and misused the established system of self-help groups in the state.

“In the name of commercialisation of microfinance, institutions have been charging interest rate as high as 30%-50%, resulting in a huge burden on the poor. It is a matter of concern that the flat rate of interest concept in the sector intended to facilitate easy calculation of interest amount by illiterate clientele is misused because the effective rate of interest is concealed and the poor do not understand the intricacies of such charges,” the state government’s report said.

Calling the recovery process adopted by microfinanciers as “no holds barred, cruel and barbarous”, the state said institutions were not working for the inclusion and instead focused on profit making contrary to the spirit of social investment.

“The recovery (by microfinanciers) is done by agents. Mostly they are ruffians who can threaten the people to submission,” the report said.