The Andhra Pradesh Government has made commendable efforts to protect borrowers nearly 10 million households/borrowers of Microfinance companies. As part of its proactive measures it submitted its views to the Reserve Bank of India appointed sub-committee (commonly referred to as the YH Malegam Committee). The report makes a strong case for regulation of MFIs by the State Government citing various constitutional provisions. The lucid analysis on the microfinance dynamics as well as various digressions on the part of the sector make the document an important addition to the body of literature on the sector. In an important insight during the course of a personal interaction, the Principal Secretary, Rural Development, Government of Andhra Pradesh, Mr.R.Subrahmanym, IAS has pointed out that there seem to an important correlation between the NREGA and ability of the poor to pay their dues to the MFIs. He opines that the stoppage of NREGA works after the start of the monsoon rains in July, may have an important role in the inability to repay the loans to the MFIs. That perceptive observation should be cause for concern, especially for those optimists of the India growth story. If the poor households are not able to repay their loans with the Indian economy growing at 8-9 percent and with all the government spending, what would a fall in growth rates to say about 5-6 percent do to the ability of the poor to repay their loans. The interesting aspect of the recent developments is the extremely quick pace of technology adoption so that it would deny the microfinance companies an excuse about government inefficiencies. They now have a web based system that would enable the MFI to upload and seek the debt details of the borrowers in real time.
An attempt is made to summarise the important submissions of the Andhra Pradesh Government. The link to the full text of the report is given at the end of this post.
The submission starts by documenting the role of the State Government in Documenting in encouraging the Self Help Group (henceforth SHG) movement and creating the SHG-Bank linkages (p.2-7).
The submission makes a strong case against the concept of the 'bottom of the pyramid'. In the case of the MFI business, the submission points out that "for the first time, profit has been made out of poor; although it has been used to spread activities into other areas" (p.9). This has become possible by the companies making profits off the poor for the first time and use the proceeds to spread into other areas. This has enabled the MFIs to mobilise funds from investors in different parts of the world.
The Government of AP has objected to various practices of the MFIs. These include pushing credit by the agents/officials of the MFIs through targets to various officials of the companies. These 'loans-with-no-questions-
A pertinent point that the submission makes is that the supposed claim of the MFIs about 100 percent recovery is largely a mirage and the process of ever-greening of loans (a process of repaying old loans by sanctioning new loans) as common (p.9).
The report blames the practice of attracting private equity investors as another source of the problem. It says that "these PEs are not social investors and therefore drive MFIs to earn more profits for them defeating the very purpose of Financial Inclusion" (p.10).
Importantly, the submission has pointed out that there is no difference between the MFIs and the traditional money lender, except that they are located outside the village, whereas the latter lived in the village. "In the interest rates, the methods of recovery, the attitude towards poor - there is no difference between the MFI and the moneylender anymore. Moneylenders don't go out and market their loans as MFIs do. Besides, moneylenders make loans strictly against collateral and this is a built in check on lending" (p.10-11).
The average per member loan for the MFIs in the state was Rs.13,900 which is almost equal to the per member loan accessed by members through SHGs from banking sector. However, many members have accessed loans from more than one agency and the borrowings are in the range of about Rs.40,000 - Rs.50,000. The repayment period of the MFIs is 50-52 weeks as against 3 years (p.13).
The submission notes that "the loans are accessed by about 80 lakh households, the average debt per household is about Rs.30,000 to be repaid per annum. This translates to nearly 75% of the total annual income to be spent on debt servicing. Clearly, the loans are not serviceable; and the credit that has been pumped is vastly excessive, and beyond the capacity of the poor" (p13). It finds it "ironical that the extent of debt contracted by poor from different MFIs is to be serviced within a period of ONE YEAR. It is also difficult to comprehend as to how the poor with a meager income will be in a position to service the loans ranging from Rs.30,000-50,000 paying usurious interest rates in excess of 30% and meet their living expenses all totaling to about Rs.75,000-100,000" (p.14).
Among the various issues that the Government of Andhra Pradesh objects include: Charging usurious rates of interest, levying of other charges, recovery of loans in weekly installments, multiple lending, opaqueness of operations and coercive recovery methods (p.13-18).
In the case of high interest rates it is points out that, "in the name of commercialisation of microfinance, MFIs have been charging high interest rate as high as 30-50% resulting in huge burden on the poor. It is a matter of concern that the flat rate of interest concept in MF sector intended to facilitate easy calculation of interest amounts by illiterate clientele is misued as effective rate of interest is concealed and poor do not understand the intricacies of such changes" (p.15).
MFIs also charge processing and other charges, collect interest free deposit upfront, collect interest rate deposits on a monthly basis, collect interest on loans upfront, and all these increase the cost of borrowing. It is to be understood that the MFIs claim operational cost in excess of 10% which is built into the interest cost but also recover the amounts separately to meet the same! It is therefore not astonishing to state that the RoA of MFIs is very high at about 4-5 %. (p.15)
Download the Full Report
An attempt is made to summarise the important submissions of the Andhra Pradesh Government. The link to the full text of the report is given at the end of this post.
The submission starts by documenting the role of the State Government in Documenting in encouraging the Self Help Group (henceforth SHG) movement and creating the SHG-Bank linkages (p.2-7).
The submission makes a strong case against the concept of the 'bottom of the pyramid'. In the case of the MFI business, the submission points out that "for the first time, profit has been made out of poor; although it has been used to spread activities into other areas" (p.9). This has become possible by the companies making profits off the poor for the first time and use the proceeds to spread into other areas. This has enabled the MFIs to mobilise funds from investors in different parts of the world.
The Government of AP has objected to various practices of the MFIs. These include pushing credit by the agents/officials of the MFIs through targets to various officials of the companies. These 'loans-with-no-questions-
A pertinent point that the submission makes is that the supposed claim of the MFIs about 100 percent recovery is largely a mirage and the process of ever-greening of loans (a process of repaying old loans by sanctioning new loans) as common (p.9).
The report blames the practice of attracting private equity investors as another source of the problem. It says that "these PEs are not social investors and therefore drive MFIs to earn more profits for them defeating the very purpose of Financial Inclusion" (p.10).
Importantly, the submission has pointed out that there is no difference between the MFIs and the traditional money lender, except that they are located outside the village, whereas the latter lived in the village. "In the interest rates, the methods of recovery, the attitude towards poor - there is no difference between the MFI and the moneylender anymore. Moneylenders don't go out and market their loans as MFIs do. Besides, moneylenders make loans strictly against collateral and this is a built in check on lending" (p.10-11).
The average per member loan for the MFIs in the state was Rs.13,900 which is almost equal to the per member loan accessed by members through SHGs from banking sector. However, many members have accessed loans from more than one agency and the borrowings are in the range of about Rs.40,000 - Rs.50,000. The repayment period of the MFIs is 50-52 weeks as against 3 years (p.13).
The submission notes that "the loans are accessed by about 80 lakh households, the average debt per household is about Rs.30,000 to be repaid per annum. This translates to nearly 75% of the total annual income to be spent on debt servicing. Clearly, the loans are not serviceable; and the credit that has been pumped is vastly excessive, and beyond the capacity of the poor" (p13). It finds it "ironical that the extent of debt contracted by poor from different MFIs is to be serviced within a period of ONE YEAR. It is also difficult to comprehend as to how the poor with a meager income will be in a position to service the loans ranging from Rs.30,000-50,000 paying usurious interest rates in excess of 30% and meet their living expenses all totaling to about Rs.75,000-100,000" (p.14).
Among the various issues that the Government of Andhra Pradesh objects include: Charging usurious rates of interest, levying of other charges, recovery of loans in weekly installments, multiple lending, opaqueness of operations and coercive recovery methods (p.13-18).
In the case of high interest rates it is points out that, "in the name of commercialisation of microfinance, MFIs have been charging high interest rate as high as 30-50% resulting in huge burden on the poor. It is a matter of concern that the flat rate of interest concept in MF sector intended to facilitate easy calculation of interest amounts by illiterate clientele is misued as effective rate of interest is concealed and poor do not understand the intricacies of such changes" (p.15).
MFIs also charge processing and other charges, collect interest free deposit upfront, collect interest rate deposits on a monthly basis, collect interest on loans upfront, and all these increase the cost of borrowing. It is to be understood that the MFIs claim operational cost in excess of 10% which is built into the interest cost but also recover the amounts separately to meet the same! It is therefore not astonishing to state that the RoA of MFIs is very high at about 4-5 %. (p.15)
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