Andhra Pradesh Microfinance Crisis And Its Aftermath

The microfinance industry served millions of poor in rural areas providing them small loans to earn their livelihood, but AP govt brought an ordinance in 2010 and it brought the industry to its knees. Its impact not only killed the industry in Andhra Pradesh but also had its impact felt across the MFI in India. As per a report by “M-CRIL Microfinance Review 2012: MFIs in a Regulated Environment” M-CRIL comes up with the financial and social analysis of this whole issue.

As people stopped making payments whole Microfinance industry came to a standing halt, the sentiment that people had was that the govt will not allow the industry to work anymore therefore no need to make payments, this problem was also abetted by political parties who asked people not to make payments anymore to MFI’s anymore.

From 62% per annum growth in terms of numbers of unique clients and 88% per annum in terms of portfolio over the five years 2005‐2010 – and around 32 million borrower accounts around October 2010, India was the largest MFI sector in the world. This number reduced and the number of effective clients served reduced by 35% by the end of year 2011 to 21 million account.

 As people stopped making payments on the one side on the other side Commercial institutions who were more than willing to provide finance to the MF industry pulled back their hands. During 2011‐12, the private sector banks were in full flight from the microfinance sector, dismayed at the prospect of huge losses on the AP portfolio. By end‐March 2012, institutional lending to MFIs had declined to Rs 15,136 crores ($2.97 billion), down by over 20% from the estimated peak of around Rs  18,000 crores in October 2010.

 

From a PAR of 0.67 in 2010 the PAR has increased to 29.5 % in the state of Andhra Pradesh, this makes it extremely risky portfolio which will act as a deterrent to any institutional lending to the sector. Operating efficiency has been adversely affected as portfolio management issues and client protection compliance expenses have increased OER. Cost per borrower has risen sharply as MFIs first pursued growth at all costs and now have to put considerable effort into client protection measures and follow up of repayments

 

As industry comes to a halt the ones who are most severely affected are the women in rural AP. The relation between women and MFI can be understood from the fact that the overwhelming majority (98%) of Grameen Bank in Bangladesh borrowers are women and similar is the case in India

 

By November 2012, one medium‐sized MFI that worked exclusively in the state has effectively been taken over by its lenders through the conversion of a significant part of their debt into equity and some of the larger MFIs have negotiated a six‐year restructuring of their debt with their major lenders. Elsewhere, the shrinking portfolios some MFIs (in the absence of bank funding) have caused operational problems and led to the take‐over of at least three MFI managements by investors. More acquisitions of this type are likely to occur in the near future.

 

All microfinance stakeholders, whether within or outside Andhra Pradesh now await the passage of

“The Micro Finance Institutions (Development and Regulation) Bill, 2012” tabled in the national Parliament on 29 May 2012. However the bill is stuck in parliament and with the central govt unable to come out of the firefighting mode due to spate of corruption scams by its ministers and therefore has been unable to get this bill passed.  

In the meantime, the Government of Andhra Pradesh continues to challenge the constitutional validity of the bill on the grounds that in the Indian Constitution this despite the same party ruling at both center and the state. And if such a thing does happen it will be the end of road for the MFI in AP and those who will suffer will be millions of poor who will be denied a chance to earn their livelihood by their own efforts.

By: Saurabh Sinha

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