Microfinance Sector in Andhra Pradesh: A Snapshot of the Recent Events

The Microfinance sector has been in the news for all the wrong reasons. It is imperative that readers understand the dynamics of the sector in terms of size before considering other aspects of the sector, including the culture of debt that they have spawned as well as their business dynamics. 

Andhra Pradesh is particularly important for the Microfinance sector as it contributes about 40% of the sectors revenues in India (The Economic Times, 13 October 2010, p.1).

The statistics given below have been compiled from various Newspapers with sources acknowledged where necessary.

Micro Finance Institutions Network, a self-regulatory body of MFIs, claims that of its 44 members  20 of them are active in Andhra Pradesh (who are registered under the RBI NBFC MFI norms) and these members cumulatively have:

• Lent nearly Rs.9000 crores (about US$1.9 billion) to 6.5 million poor borrowers
• Nearly Rs.200 crores (approximately US$45 million) of weekly collections have been delayed.
• if they were to follow the rules stipulated by the Govt of AP, then it would take 60-90 days to collect their dues.(The Hindu, 20 October 2010, p.4. Hyderabad Edition)

The Government should hopefully realise the present problems are largely a consequence of its decade old attempt to encourage the sector. Such harsh methods of loan collection are a natural corollary and are inherent in the finance business. It would not be far from the truth to claim that the government encouragement  till date was essentially an attempt to create a corporatised version of the traditional money lenders.

Using strong arm tactics to collect a loan is not new in India, and there are innumerable instances when the courts and the police had stepped in to put an end to their excesses. Due credit should be given to the AP police, who since 2002 taking a proactive role in curbing the excesses of financiers. Mr.N.V.Surendra Babu, the erstwhile Commissioner of Police, Vijayawada was the first person who locked up private moneylenders, after the excesses of the financiers (both individual and NBFCs). 

In the case of the recent MFI episode, the Director General of Police has stated that 22 persons had committed suicide thus far on account of harassment of MFIs (The Hindu, 20 October 2010, p.4. Hyderabad Edition) and he has clearly stated that the police are thinking of taking Suo motto cases against those who harass borrowers. Vikram Akula has stated that of the people who have committed suicide, 17 have borrowed money from SKS.

The MFI business has extra-ordinary margins even by money-lending standards or thoseof the finance and banking business. Vikram Akula has stated that of the 26% that they charge from borrowers, approximately 8.5% is the cost of borrowing, 9% is the cost of delivery, 1% RBI stipulation for hardship cases, corporate tax of 3% and 4-5%, margins for the company (The Economic Times, Hyderabad Edition, 16 October 2010, p.4). MFIs claim that their rate of interest is not high (especially when compared to the private money lenders) and they are willing to cut the rates to borrowers if the banks lower their interest rates (Business Line, 20 October 2010, p.1). Since about 80% of the capital deployed by the MFIs originates from borrowings from banks (Business Line 20 October 2010, p.6). However, the rates charged by the banks to the MFIs are not high considering that personal loan borrowers pay 14% while Small and Medium Enterprises pay from 10-14% if not more. More importantly, the yield on the Government of India 10 year bonds is 7.80%, indicating that the MFIs have been major beneficiaries of bank largesse to the MFIs due to the RBI guidelines that allow banks to mark lending to MFIs as priority lending.

On close scrutiny of the margins of MFIs indicate that while the cost of delivery claimed by MFIs is too high and they dont take into account the fact that economies of scale tends to reduce the costs. The costs to companies to SKS and others also mask the high management benefits in the form of high salaries. Ironically, other NBFCs (especially those listed ones) claim that their margins are a maximum of 3%.

At the end of the day, banking or finance business requires specialised knowledge about the client. Till now it was wrongly believed that MFIs had this specialised domain knowledge. It now appears that their knowledge was (and is) is only as superficial as the big banks. So it may be prudent for the banks to actually reconsider the supposed value of the MFIs. It may be better for the banks to seriously consider the banking correspondents route rather than the MFI route.

What is lost in the din created due to this fresh problems in the MFI sector is the fact that who will be able to deliver credit to the poor. There is a need for objective thinking on the alternatives so that the poor are not starved of credit.