Is Maharashtra The Next Andhra Pradesh For The Microfinance Industry?

Did demonetisation fan the flames on a brewing crisis? 
A woman  sells chocolate from inside her provision store started with assistance money lent SKS Microfinance Ltd. (Photographer: Adeel Halim/Bloomberg)
A woman sells chocolate from inside her provision store started with assistance money lent SKS Microfinance Ltd. (Photographer: Adeel Halim/Bloomberg)

Microfinance companies in Maharashtra are seeing early signs of trouble, reminiscent of a crisis that gripped the sector in 2010 when repayments came to a virtual standstill in Andhra Pradesh revealing poor lending practices by the industry.

While the situation is nowhere near as bad in Maharashtra, recent events suggest that excessive lending and political interference have once again resurfaced. The state accounts for 12 percent of the total microfinance portfolio in the country.

Concerns about excessive lending by microfinance institutions (MFIs) in some states, including Maharashtra, have been brewing for some time now but were brought into focus last week when two legislators raised the issue in the Maharashtra assembly.

Bharatiya Janata Party members - Milind Mane and Ashish Shelar - alleged that MFIs operating in the Vidarbha region in Maharashtra were indulging in coercive recovery practices and harassing women due to non-payment of dues. In response, the Maharashtra government told the legislative assembly that it will set up a Special Investigation Team (SIT) to look into the matter.

According to V Giriraj, finance secretary in the government of Maharashtra, apart from the state administration, the central government and the Reserve Bank of India (RBI) are also looking into the concerns being raised.

Demonetisation: The Immediate Cause Of Trouble

The immediate trigger for the trouble appears to be the government’s decision to withdraw notes of Rs 500 and Rs 1,000 from circulation starting November 8. The announcement left the country grappling with a cash crunch. For the microfinance industry, where disbursements and collection happen largely in cash, this meant that business came to a virtual standstill.

On November 21, the RBI said that borrowers, including clients of MFIs, would get an additional 60 days to repay loans. While the regulator only intended this to be a deferral in repayments, some people have seen this as a waiver of sorts.

Companies providing small credit to people in the regions of Vidarbha and Amravati are facing problems in collecting repayments after demonetisation, said V. Giriraj.

According to a government official, who spoke on the condition on anonymity, local politicians are also trying to take undue advantage of the situation and are encouraging customers not to repay. This situation prompted some microfinance companies to approach the government and seek intervention.

“When people couldn’t offer new notes for repayment, we had to hold back collections and then the RBI notified that a moratorium of 60 more days be given to borrowers and that’s when the confusion started,” said Saibal Paul, associate director, Sa-Dhan, a self regulatory organisation (SRO) for the microfinance sector.

Paul added that this confusion spiraled into non-compliance.

Local leaders misunderstood the circular and took it to be a loan-waiver and prompted people to not pay back their dues. This meant that people huddled together and started calling for a waiver of loans citing inability to pay.
Saibal Paul, Associate Director, Sa-Dhan

The Red Flags Were There To See

Much before demonetisation hit, there were signs of excessive exuberance in the sector.

The gross loan portfolio of MFIs grew 84 percent in fiscal 2016, according to data from the Microfinance Institutions Network (MFIN). In the previous two years, the portfolio increased by 48 percent and 69 percent respectively.

In August 2015, Religare Capital Markets published a report titled ‘Indian Microfinance - Crisis Brewing’. The brokerage house pointed out “multiple weak spots” in the sector including “alarmingly high” penetration levels for microfinance companies in certain markets.

According to the report:

  • Maharashtra was ranked among the top five states with the highest MFI penetration
  • 47 percent of poor households in the state had taken credit from microfinance firms
  • Microfinance debt per poor household in Maharashtra was at Rs 8856
  • Number of MFIs operating in the state rose to 27 in 2015 from 17 in 2012

This rapid growth has also attracted a fair share of unregistered and unregulated lenders, said Paul while adding that such entities are flouting rules and “playing tricks” on people by luring them to borrow more than they should.

“I am not saying that there’s no multiple lending happening in the sector but it’s most likely non-member MFIs which are giving out multiple loans in the same household and distorting the situation,” he said.

Bending The Rules

According to the RBI guidelines, a borrower can’t take credit from more than two lenders at a time, subject to a total limit of one lakh rupees. Experts, however, have pointed out that the restrictions do not apply to banks lending to the same set of clients. They also don’t account for borrowings from the informal financial network of moneylenders.

“While it is very difficult to determine the number of clients that have borrowed from two MFIs, our interaction with 12 companies and Equifax (credit bureau with 70 percent market share) suggests that overlapping could be in the range of 25-40 percent,” Religare said in its report.

Ratings agency India Ratings also expressed concerns on multiple lending in its report on MFIs released last month. 80 percent of the companies are following the ‘two MFI’ rule and not the two lender rule, said Jindal Haria, associate director, India Ratings.

They are not supposed to lend to people who have availed two loans already but the data from self-help groups, informal lending and other sources isn’t considered by MFIs...There is definite borrower overleveraging in Maharashtra and some MFIs are not actually operating according to norms.
Jindal Haria, Associate Director, India Ratings

The Situation On The Ground

Vijay Jawandhia, a farm activist in Maharashtra, said that the situation has worsened in recent weeks.

“Same set of people have taken loans in three different groups or villages. Obviously, they can’t repay all of them so they have to run away because MFIs start harassing them,” said Jawandhia while adding that the situation is “much like what we saw in Andhra Pradesh.”

He blamed both MFIs as well as borrowers for allowing the situation to get to this point. While MFIs lured borrowers with lucrative schemes that people did not understand, borrowers become greedy due to the easy access to money, said Jawandhia

People started pooling themselves into two-three different groups and availed loans because there was heavy advertising that MFI loans are cheaper. But they discovered later that 24 percent per annum is still a heavy interest burden to pay.
Vijay Jawandhia, Farm Activist

Not everyone believes the situation is serious.

Samit Ghosh, chief executive officer of Ujjivan Financial Services said that collections and disbursals have picked up after a sharp fall following the announcement of demonetisation.

“The collections and disbursals are ongoing after an initial plunge from demonetisation,” said Ghosh. “There has been a problem only in areas like Amravati but it’s been brewing from some time now. There have been demonstrations by borrowers who do not want to pay.”

“There’s not much to be worried about,” said Ghosh.

India Ratings, in its report, however had cautioned about the impact of demonetisation on microfinance at a time when the sector is coming off a high growth period.

There is a likelihood of a cash flow mismatch for MFIs as people lose employment or a part of their wages after demonetisation, forcing them to reorient their budgets, said India Ratings

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