Andhra Pradesh Microfinance crisis

Submitted by:Shivam Agarwal (A002) Swati Aggarwal (A003) Ankit Kandoi (A028) Aditya Sharma (A051) Piyush Singh (A052) Anchit Verma (A060)

Introduction

A collective term used for financial intermediation services to low income group and poor customers
Services offered are Credit facility, Savings Accounts, Money transfers, Remittances and Insurance The microfinance market grew by nearly 20% in 2012 and increased by 14% in 2013 MFIs would grow at an annual pace of 30%-35% over the next 3 years on the back of improved fund availability

Pillars of Micro finance

Supply of credit
Demand for finance Intermediation by individuals or authorities

Regulation by statutory bodies

Regulation Supply Intermediation Demand

MFI Growth Spurge

Asia has been leading the global exposure to microfinance. In 2010, around 74 million borrowers were based in Asia (Microfinance Information Exchange, 2012). 7 out of every 10 of such borrowers live in India Over the past decade India has become the most dynamic country for microfinance. The number of borrowers increased 5-fold in just six years until 2010. In 2011, there was an estimated $4.3 billion given out as loans to around 26.4 million borrowers 90% of it was concentrated in just 2 states: Andhra Pradesh and Tamil Nadu.

Microfinance In Andhra Pradesh

Andhra Pradesh the Mecca of Microfinance in India has the highest penetration rates than any other state in India. Several of Indias largest MFIs including SKS, Spandana, BASIX are based in Andhra Pradesh and began operations in the state The state is home to Indias largest state-led microfinance initiative the Velugu program.

Krishna Crisis

Indias five largest MFIs (SKS,BASIX, Spandana, Share, and Asmitha) were headquartered in AP

Substantial exposure to the state.

A significant clash of ideology between the for-profit MFIs and the state-run SHG programme.

First tension surfaced in 2006, when Govt. clamped down on two large MFIs Share and Spandana

It closed down around 50 branches in the Krishna District of AP

The Andhra Pradesh Microfinance Crisis

Reported negative effects on microfinance customers

In the enforcement process of lending:

Excessive peer pressure Hazzling by credit agents

Overindebtedness:

Borrowers taking multiple loans

Perverse incentives:

Losing ones life frees the remainder of the family from the debt

Andhra MFI Ordinance

An Ordinance to protect the women Self Help Groups from exploitation by the Micro Finance Institutions in the State of Andhra Pradesh and for the matters connected therewith or incidental thereto

It extends to the whole of the State of Andhra Pradesh. It shall apply to Micro Finance Institutions whether they had come into existence before or after the commencement of this Ordinance. Registration:

Within 30 Days, Apply for Registration Stating: Villages/Towns they are Operating Or Propose to Operate Rate of Interest Charged System of Conducting Due Deligence List of Persons Authorized for Conducting Lending/Recovering Activity

Andhra MFI Ordinance

No MFI to operate without Registration

Registering Authority to conduct Verification and can cancel the registration provided to the Microfinance Institution
No member of an SHG shall be a member of more than one SHG

No MFI shall seek any security from a borrower by way of pawn, pledge or other security for the loan.
All MFIs shall display the rates of interest charged by them in a conspicuous place in their premises in bold letters visible to the members of the public

Andhra MFI Ordinance

No MFI shall extend a further loan to a SHG or its members, where the SHG has an outstanding loan from a Bank unless the MFI obtains the prior approval in writing in such manner as may be prescribed from the Registering Authority after making an application seeking such approval. It is the Duty of MFIs to maintain accounts and furnish copies Every MFI shall submit a Monthly Statement to the Registering Authority before 10th day of every month giving therein the list of borrowers, the loan given to each and the interest rate charged on the repayment made.

Fast Track Courts to be formed to settle the disputes.

Andhra MFI Ordinance

All persons who resort to any type of coercive measures against the SHGs shall be liable for punishment of imprisonment up to a period of three years or with fine which may extend to one lakh rupees or with both. The Government may, from time to time, issue such orders, instructions and directions not inconsistent with the provisions of this Ordinance The Government shall prepare an annual report on the administration of this Ordinance and the same shall be placed before the State Legislature.

Consequence for microfinance companies

De facto lending moratorium since October 2010

Repayment rates down from well over 90% to less than 20% Rating agencies have down-graded credit ratings of microfinance companies Commercial banks have stopped to re-finance microfinance companies

Major microfinance companies have stopped handing out new loans

Broader Implications

Credit crunch for the poor Credibility of microfinance companies as lenders damaged Spill overs to microfinance in other Indian states and other countries

Have we seen just another futile attempt at lending to the poor?

SKS MICROFINANCE

SKS What went wrong !!

On heels of the growth spurt SKS Microfinance went public, culminating the Indian MFI bubble in summer 2010.

For SKS, the Ordinance was nonetheless a catastrophe .

It damaged its saintly reputation as much as the signal it sent to investors and lenders that borrowers would not be forced to repay their loans at any cost.

After less than a week, SKS announced their decision to cut interest rates; but this move backfired because it drew attention to what were publicly perceived as very high interest rates.

The Malegam Committee

The Board of Directors of the Reserve Bank of India, at its meeting held on October 15, 2010 formed a Sub-Committee of the Board to study issues and concerns in the microfinance sector
To review definition of MFIs and Microfinance To examine the prevalent practices To delineate the objectives and scope of regulation of NBFCs Enhancing transparency disclosure and best practices A grievance redressal mechanism Classification of loans to MFIs as PSL

The need for Regulation

The need for a separate category of NBFCs operating in the Microfinance sector arises for a number of reasons
The borrowers in the Microfinance sector represent a particularly vulnerable section of society NBFCs operating in the Microfinance sector not only compete amongst themselves but also directly compete with the SHG-Bank Linkage Programme Credit to the Microfinance sector is an important plank in the scheme for financial inclusion

1.

2.

3.

4.

Increasing exposure of banks

Areas of Concern

Between 31st March 2007 and 31st March 2010, the number of outstanding loan accounts serviced by MFIs is reported to have increased from 10.04 million to 26.7 million
The outstanding loans have increased from about 3800 crores to 18,344 crores

Despite this , there are certain areas of concern

unjustified high rates of interest lack of transparency in interest rates and other charges multiple lending

upfront collection of security deposits

over-borrowing ghost borrowers coercive methods of recovery

Blame

MFIs that failed to restrain aggressive growth even as the market became increasingly saturated.

Investors that paid dearly for shares in the MFIs, they need fast growth to make their investments pay off.

Public sector policy environment that has treated microfinance institutions as orphan children of the financial sector rather than helping them to build solid foundations.

Indian policies have led to poor governance frameworks for MFIs

foreign investment rules have made it hard for international social investors to participate in ownership and governance.

Diagnosis

Microlending rather than microfinance crisis

Demand side complication: Financial inclusion has proceeded too quickly for (mostly poor) individuals with little financial literacy

Supply side complications:

1. 2. 3.

Large growth in supply of (relatively cheap) loans Regulatory failure regarding institutional structure and enforcement techniques Inappropriate one-size-fits-all approach to lending by the microfinance companies

Post Crisis Focus

Attention on modifying specific lending behaviors: restraining growth, instilling better client protection practices, developing credit bureaus.

An opportunity now for Indian policy makers to think more deeply about the role of MFIs in the financial sector.

Welcome the contribution MFIs can make to reaching the poor with financial services

Craft a set of ground rules that promote balanced product offerings, solid institutional development and good governance.

Make a scenario where we could talk about sharing the credit rather than the blame.

Takeaways from AP Crisis

The issues of multiple lending and excessive borrowing came to the fore. It also forced MFIs to take a peek into the code of conduct being followed by them. To overcome the problems of multiple lending and over-indebtedness, we are submitting client records to the credit bureau as mandated by RBI. Nearly 100 per cent of our records are now available with the two credit bureaus Equifax and High Mark Credit Information Services Ltd. All MFIs now refer to the borrowers credit history before taking a lending decision. This apart, a code of conduct has been deployed for the industry and is being actively monitored by the Microfinance Institutions Network (MFIN). As per the code of conduct, all MFIs have to ensure transparency in interest rates, processing fee and other terms and conditions pertaining to any credit extended. They are also mandated to provide these terms and conditions in vernacular language and are asked to keep an ethical behaviour towards their borrowers.

Some Suggestions
For Research:

More research on how we can lend to the poor, in particular on the interaction between lending techniques and the outreach vs. sustainability issue Researching features of indigenous financial institutions and linking them with modern microfinance

For Policy:

Governments should be careful with drastic ex-post interventions when developing an economic sector Current Microfinance Crisis shows no indication of a flaw fatal to the system, but rather a need for gradual improvement of the regulatory framework

Thank You