Microfinance in Andhra Pradesh: Intent on Buying Time

The Microfinance sector seems to have been emboldened by the support they have received from different quarters of the RBI and seem intent to take advantage of the fluid political conditions in Andhra Pradesh. The Microfinance Institutions Network (MFIN), a self regulatory industry body, now seems keen on postponing the passage of a law in Andhra Pradesh Assembly that will make their recent ordinance (Andhra Pradesh Microfinance Institutions (Regulation of Money Lending) Bill, 2010) by demanding the constitution of a house committee to debate the provisions of the ordinance before it is passed into a law. This seems to be a very smart strategy that would buy it sufficient time till the Y.H.Malegam committee submits it report to the Reserve Bank of India, which is expected latest by the end of January 2011. The MFIs seem to be hoping that in case the Ordinance is not converted into a law, and the RBI submits its report, then they are likely to be given a new lease of life. It is likely that the Y.H.Malegam committee would ask the RBI to take a strong view of using violent methods to collect the loans, while continuing to advocate the well being of the Microfinance sector by recommending that the RBI avoid regulating interest rates. As we have pointed out in the past, RBI must be quite concerned with Rs.24,000 crores that the banks have lent the MFIs in different parts of India, of which nearly Rs.7,200 crores in supposedly in Andhra Pradesh ("MFIN wants House Committee to look into MFI Bill", Business Standard, 10 December 2010, p.5). Once the RBI report is published, the MFIs seem to calculate that they can use the RBI report to dilute the provisions of the AP ordinance, which has become a problem in their unfettered growth. It has been pointed out that the RBI might take measures that would provide some relief to the MFIs.

Andhra Pradesh Government has announced that out of 273 MFIs operating in the state, 270 have already registered either with the District Rural Development Project Officer at the rural level and the Mission for Elimination of Poverty in Municipal Areas in the Urban regions.

The MFIN has claimed that they have three major objections to the AP Ordinance.
1. The ordinance insists on prior approval from the District Rural Development Agency for lending to members of the self-help groups covered by the government. The MFIs suggest that credit bureaus should be used to know the indebtedness of the SHGs and allow up to Rs.50,000 of debt to each household, even if it were to mean multiple lending, which the ordinance now forbids.

    * The MFIs seem to clearly imply that they donot intend to change their practices and instead would like to pass on the responsibility of compiling and computing the indebtedness to the credit bureau, so that they can continue to push credit.
    * It is indeed surprising that the MFIs are keen on lending to using the structures (like the SHGs) that have already been established and which are currently subsidised by the government. It is surprising that the policy makers in RBI seem to be unaware that the MFIs are not expanding rural credit delivery to the poor but are instead undertaking business in channels that are already established. If the MFIs are so keen on lending to the SHGs, what is the essential purpose that they serve in financial inclusion, other than pushing more credit to the poor? The MFIs themselves have stated that this means that they will not be able to give any new loans to SHG members or about 1.09 crore members  ("MFIs seek changes in Bill", The Hindu, 10 December 2010, p.4). MFIN claims that they have not been able to disburse more than Rs.1200 crores (approximately US$250 million) through nearly 1.2 million loans due the current problems ("MFIs may have to close down AP Operations", The Economic Times, Hyderabad Edition, 10 December 2010, p.8).

2. The AP government has given the MFIs only conditional approval to their operations as the MFIs were unable to furnish new ration card numbers and self help group names for all the 97 lakh borrowers. Interestingly, one borrower from an MFI confided privately that it was common practice for the MFI to take away the original ration card of the borrower as a security. Incidentally, such incidents were also reported in the media over the past one month.

3. The condition that MFIs shift to collecting their dues on a monthly basis, rather than weekly basis, has hurt them. However, they give a different spin: "... lakhs of poor borrowers were used to repaying loans on a weekly basis for years as their wages were paid daily or weekly. But this ordinance made it a monthly repayment" ("MFIs seek changes in Bill" The Hindu, 10 December 2010, p.4). No wonder everybody would like to speak for the poor.

All the lofty claims of the MFIs that they are helping the poor, seem to cut much ice. The Chairman of the Prime Minister's Economic Advisory Council, Dr.C.Rangarajan joins the ranks of Dr.Y.V.Reddy (another former RBI Governor) has called on the MFIs to overhaul their flawed business model for long-term sustainability. He has reportedly stated: "Unless they [MFIs] change their lending model, they will not be able to sustain their business for long" ("Rangarajan for recast of MFI business model", Business Standard, Section II, 10 December 2010, p.5). He has asked the MFIs to lend more for productive purposes and merely for consumption related expenses, as the current MFI lending was directed. Like the AP Government, he objected to their disbursing multiple lending.

Despite the growing concern about their business practices it is clear that the MFIs will be tolerated and probably let off only with a rap because they now a systemic problem. This will leave them free to continue lending at usurious purpose, while claiming to work for the poor. One migrant from Cuddapah District confided that in their district the MFIs charge an interest rate that runs into nearly 48% per month. Yet, in the current economic environment, the government can ill-afford additional banking losses running into thousands of crores if the business is not given a new lease of life. The AP government has wisely decided to table the Ordinance so that it could be passed into a bill in the Assembly. However, the bill will be taken up for discussion in the next week and is likely to be passed, since most of the political parties are keen to see that there is at least a semblance of order in the MFI sector.