For microfinanciers, Andhra Pradesh twists the knife

Microfinance institutions (MFIs) may be confident of a turnaround in the situation in Andhra Pradesh, but the state government isn’t ready to oblige them just yet.

To be sure, Andhra Pradesh has the biggest self help group (SHG) community in the country, a segment the MFIs are heavily dependent on for their business.

It is these SHGs the state government is now targeting, with interest-free loans, starting January 1, 2012 — a move that could queer the pitch for MFIs further.

For now, the state government has set a disbursement target of about `10,000 crore a year and is willing to bear the `1,400 crore-odd interest burden on the funds, which would be raised from various sources.

Data put together by the officials show the total MFI exposure in the state at about `10,000 crore —- roughly a third of the `30,000 crore MFI market in India.

“That is the total quantum that would become available to the borrowers without any interest through banks,” a source said.

“This is a bank-linked programme where the banks would primarily handle the disbursal. However, the government will bear the interest burden. Though the modalities are still being worked out, it would ensure that the SHGs do not seek any other micro-lending since they will not be paying any interest on the loans.”
The move has the MFIs worried, though industry sources said they were waiting for the scheme to launch.

An MFI source said the state government has already stalled the expansion of MFIs in the market by creating roadblocks such as requirement of prior approval for each loan application. The latest move only worsens the blow.

“There are two difficulties for MFIs with the proposed interest-free loans. First, MFI lending is linked to repayment, meaning those looking to take further loans from an MFI would have to repay one already taken. Now, with the government stepping in with a loan scheme, repayment of loans that are due are completely doubtful.

Secondly, prospective borrowers will wait for the scheme instead of coming to MFIs for loans and pay interest of up to 25%. Overall, it is a double whammy. While the monies that have already been disbursed would get stuck forever in the market, the credit expansion to build the economies too would hit a dead end,” said a senior functionary of a major MFI.

According to the MFI officials, the efficiency of the government machinery in handling microfinance transactions is suspect.
Government officials, however, are confident of pulling it off using the existing infrastructure at the Panchayat level. They are preparing to assess and identify the potential beneficiaries of the proposed interest-free loans.

The government scheme would be available only to the SHGs which invest the funds on livelihood improvement schemes to ensure that the loans are promptly repaid.

Many MFIs are alleged to have given away loans for aspirational needs including purchase of colour televisions or going out on a pilgrimage.

Meanwhile, the Act promulgated by the Andhra Pradesh government to rein in the MFIs is still in force and the microlenders are almost in a mood to write off the loans due for collection.

Hopes that the MFI Bill would be taken up in the current session of Parliament may be set to get dashed, too.

“The key issue is that with state and central government elections due over the course of next two years, financial discipline could take a back seat amongst the borrowers and more political interference could occur, which perhaps is the biggest overhang for the sector,” Suresh Ganapathy, Mudit Painuly and Yuvaraj Bhole of Macquarie Capital wrote in a report dated December 1.

“Regulatory framework can’t take care of financial discipline unfortunately and the legal system in India being so weak, disputes between regulators and state jurisdictions can take ages to get resolved,” the Macquarie Capital trio wrote. “Unless there is political will, the issues related to microfinance can’t be resolved.

So most of the banks where these MFI loans are restructured would eventually have to write them off. Fortunately, the exposure to microfinance loans as a proportion of overall loan book is now sub-100 bps for most of them and hence the impact is unlikely to be meaningful even if they were to be written off.”