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Microfinance, Society and Economy
Can india’s MFI industry be saved?

Janauray 2012 ... The government and RBI must draw an MFI survival strategy before it’s too late. We need them at least till such time the banks are ready to reach out to the masses


Peter Burgess

Columns Can india’s MFI industry be saved?

The government and RBI must draw an MFI survival strategy before it’s too late. We need them at least till such time the banks are ready to reach out to the masses
Andhra Pradesh, India’s fourth largest state by area and fifth largest by population, has set a world record. About 9.2 million borrowers in the southern state have defaulted in repaying money borrowed from microfinance institutions (MFIs)—the largest number of defaulters in any location in the world. As Andhra Pradesh has a population of 84.6 million (2011 census provisional figure), theoretically one in every 11 Andhraites is a defaulter. This, however, is not the actual case as most such borrowers have more than one account. By industry estimates, around four million people of the state—almost all women—have turned defaulters. As the female population in Andhra Pradesh is 42.1 million, one in every 10 women in this state has borrowed from MFIs but not repaid.

To put the Andhra phenomenon in perspective, in 2008, when the Indian government announced a Rs60,000 crore debt-waiver scheme for farmers across the nation, some 40 million farmers didn’t repay debt. Indeed, the money involved in Andhra Pradesh is minuscule compared with the national debt-waiver scheme, but the point to note is that in this case, the debt has not been waived even though a section of the local politicians has created that impression and encouraged borrowers not to pay back.

The MFI industry’s total exposure to Andhra Pradesh was around Rs. 7,200 crore in 2010 and they have been able to collect from the borrowers only 10% of this money. They are carrying on their books Rs. 6,500 crore worth of bad assets, and when they write off this amount in March, at the end of the current fiscal, many of India’s big MFIs’ net worth will turn negative. Unless the Reserve Bank of India (RBI) relaxes the prudential norms that stipulate a 15% capital adequacy ratio (Rs. 15 capital for every Rs. 100 worth of loans) for this set of financial intermediaries, many will have to shut shops.

The MFIs that will bear the brunt will include India’s lone listed microlender SKS Microfinance Ltd, Spandana Sphoorty Financial Ltd, Share Microfin Ltd, Asmitha Microfin Ltd and Vijay Mahajan-promoted Bhartiya Samruddhi Finance Ltd—India’s oldest MFI. In this pack, SKS Microfinance will be the least affected as it had raised money from the public through its capital float in August 2010; the others are in a bad shape. Some are restructuring the debt taken from banks. But even then, keeping themselves afloat is not an easy task as commercial banks, which provide 90% of resources that MFIs need for business, are not forthcoming in giving money for fear of piling up bad assets. Interestingly, even the MFIs which do not have any direct exposure to Andhra Pradesh are being shunned by the banks. For instance, Arohan Financial Services Ltd, an MFI in West Bengal, hasn’t got any money from banks ever since the Andhra crisis broke out, even though it doesn’t have a single borrower in the southern state. For lack of resources, it is shrinking assets and closing down offices. Utkarsh Micro Finance Pvt. Ltd of Varanasi is another instance. It lends to poor people in eastern Uttar Pradesh and Bihar. In 2010 and early 2011, banks withdrew all lines of credit. Subsequently, a few banks have started sanctioning loans but they are not releasing money.

With no fresh money in the kitty and Andhra Pradesh borrowers not repaying loans, MFIs are forced to shrink loan books, close down offices and retrench employees. The outstanding loan book of the industry, which was Rs. 30,000 crore in October 2010, has shrunk to Rs. 15,000 crore in January, and at least 30% of 1,50,0000 employees have been shown the doors.

The origin of the crisis was in October 2010 when Andhra Pradesh, which accounted for at least a quarter of the microlending industry, promulgated a law to control microlenders after a spate of reported suicides following alleged coercive recovery practices adopted by some. The law, which restricted MFIs from collecting money from borrowers on a weekly basis, made government approval mandatory for borrowers taking more than one loan.

Subsequently, an RBI panel capped the loan rate by MFIs at 26% and the margin at 12%. These norms were fine when banks were giving money to MFIs at 11%. With the increase in interest rates, banks are now charging more; and if we add to that the processing fee and the cash margin that MFIs need to keep with the banks, the effective cost of money is at least 17%. No wonder then most MFIs are making losses.

There are a few exceptions though. Janalakshmi Financial Services, which takes care of the tiny loan needs of the urban poor, is one of them. The Bangalore-based firm has grown its assets from Rs. 80 crore in March 2010 to Rs. 260 crore now. Apart from giving tiny loans, Janalakshmi distributes financial products such as pension and insurance, and sells mortgages and enterprise loans through 66 branches across 41 cities in 11 states. The Kolkata-based Bandhan Financial Services Pvt. Ltd is another MFI. It has recently overtaken SKS in terms of loan book size. In January itself it achieved the year-end target and may end the fiscal with a loan book of Rs. 3,500 crore. Its bad assets have grown but are still way below 1% of total assets and it is making profits.

The death of the MFI industry will push the poor into the grip of moneylenders and deal a blow to the government’s financial inclusion drive. The government and RBI must draw an MFI survival strategy before it’s too late. We need them at least till such time the banks are ready to reach out to the masses. At the same time, the industry needs to get rid of its obsession for growth and learn from the Bandhan and Janalakshmi experiments to reorient its business models.

Tamal Bandyopadhyay keeps a close eye on all things banking from his perch as Mint’s deputy managing editor in Mumbai. Your comments are welcome at

Showing comments
Ranbir Singh The crisis of MFIs stated in 2006 and not in 2010, when in some part the branches of mFIs were closed down and the association of NGOs/MFIs came to their rescue with introduction of code of conduct for mFIs. Sa-dhan and RBI prescribed some code of conduct but it was voluntary in nature and hardly any mFIs followed that. To have monitoring on the functioning of mFIs, GoI came with mFI regulation BIll in 2007 and with the opposition of mFIs the same died. It was again initiated in 2009 but all the big mFIs including Mr Mahajan were not in favour of mFI's regulation. But after introduction of AP Ordinance, all the MFIs fall in the line and agreed for regulation of mFIs. mFIs and money lenders - mFIs used funds of other including public (deposit of banks) for their own benefits i.e institutional money lenders. Where as the money lender use hid own fund and share full risk. mFIs in their own number game (number of clients to show supermacy over the other mFI) did see the repaying capacity of their client instead shown a green pasture in the form of easy money. mFIs operations were not transparent. Rate of interest flat or reducing balance, processing fee, holding deposit without paying interest or paying low interest, advance recovery of installments , etc. This has resulted in charged effective rate of interest upto 51 % p.a. In the present economic scenario which activity can generate income which can service the loan at such a high rate of interest. In this article it seem that we want to protect the mFIs and not the poor. No where the author has indicated the big and fat package the top managers of mFIs are given, the rationale of that. Whether the number game, incentive to staff, big fat package was not responsible. Whether lack of transparency in their operation is not responsible. At present about 70 percent of the funds to mFIs are from banking sector which also a public money, in that case whether they are not responsible to the public. There are lot of issues which need to be studied before protecting the interest of mFIs......... Ranbir Singh Like Reply 7 hours ago
Vishu_bhatnagar very well written. Good job Like Reply 10 hours ago
Prasad_ar The MFIs have posted and will continue to post losses leading to degrowth & sacking of lower level staff, while Vikram Akula (CMD) has become the highest tax paid businessman in India. What a pity? the objective of poverty reduction and upliftment has been absolutely achieved and Vikram & the top team has succeeded in starting an MFI for their poverty reduction! It is the case with most of the top MFIs operating in A.P, who are facing similar situations. The Promoters of these MFIs have absolutely achieved the objective of poverty reduction and empowered themselves to lead a lavish life for ages. Someone needs to seriously investigate the official & unofficial remuneration/expenses/funds they have got from the MFIs. It is to be noted that only a bunch of people in SKS, other than Vikram has benefited. While in the other MFIs there is no one other than the Promoter & their family members. Thier greed to charge high interest rates and earn more to receive benefits has lead to action by the local governments and resulted in this situations. The local governments are not to be completely blamed, it was good that the A.P govt. has taken some action, other wise the day light looting of the poor and staff would have continued and only the promoter /CMD families would have earned thousands of crores. A detailed study needs to be commissioned on the issues of ownership, ESOPs, expneses, cash transactions, asstes, salaries etc in the leading MFIs. A complete change of management/governance structure could only save the industry and bring new life. Like Reply 12 hours ago
suranbs Dear Editor sahib; Andhra Pradesh , has now moved from being the mecca of microFinance to the asylum for over-indebtedness . With all the mF crowding by finance institutions on an already indebted poor households from the velgau project . We have made a kitchidi out of the lives of the poor. For them there has been cultural shift , from net savers to perpetual loanees ( about 7-8 years back AP’s SHGs had surpluses savings in bank accounts and credit outstanding was less, the CDR was very less 50 % ) , today the CDR would be 600-700 percent. After all this the blame game begins and above all lobbying by learned people for so called mFIs. The studies in AP have shown that there are 3-9 loans outstanding against poor households. Can we solve this by sanctioning the next loan?. The microsave study have shown that 66 % of the poor are not repaying because they have not been sanctioned the next loan. Are we interested in ever-greening and playing with the lives of the poor. How can the 10 th loan mitigate the problem, can it service the overloaded 1-9 loans . Should we not think of other means to resolve this issue? Is financial counseling a possibility ? why are we writing such kind of articles to confuse, pressure lenders ? Why was all the rating and experts, who earned all their money, but never forecasted the problem or contacted the people to know to what was going on in their lives? Can the author question them or the PEs who had pressured for performance ? Cheers Suran Like Reply 13 hours ago 1 Like
Dhirajksinha Mr. Bandyopadhyay, you seem to have out rightly ignored the actual Microfinance which has been silently working and uplifting the poor for quite a long time. Yes, the NABARD promoted SHG model for financing the poor by developing saving habits and then financing the SHGs. Further, your concern is towards those MFI who defied the basic characteristics of microfinance like SKS, and majority of the names mentioned above. SKS got funding from Venture Capitalist. I don't need to tell you, what are the return expectations of VCs and please don't tell me that they are concerned or have any concern for the poor. The Death of these MFIs would impact the money lenders (Investors for whom you have been paid to advocate) who on the name of microfinance have been sucking the blood of the poor. It won't impact the poor people as there are many many NGOs working quite well and meeting the financial needs of the poor. Of course, the government SHG model too has a maximum outreach. Further, the government has come with Business Correspondent model which too is an initiative to cater the financial needs of the poor. Don't show your false concern towards the poor. Thanks Like Reply

Banker’s Trust | Tamal Bandyopadhyay
Posted: Sun, Jan 15 2012. 9:59 PM IST
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