The crisis facing the Indian microfinance sector following the chain of events in Andhra Pradesh (AP) “threatens to permanently damage the business model of MFIs (microfinance institutions), by impairing their growth, asset quality, profitability and capital raising ability,” according to credit rating firm Crisil Ltd.
Crisil made these observations in a press statement issued on Monday, along with placing the credit ratings of 12 MFIs under “rating watch with negative implications”.
They include SKS Microfinance Ltd, Asmitha Microfin Ltd, Bharatiya Samruddhi Finance Ltd, Equitas Micro Finance India Pvt. Ltd, Grameen Financial Services Pvt. Ltd, Spandana Sphoorty Financial Ltd and Ujjivan Financial Services Pvt. Ltd. The rating company said the trouble brewing in the microfinance industry could impact credit flow to the rural poor. Microfinance is a Rs.33,000 crore industry in India, with MFIs reaching out to an estimated 30 million people, mostly in rural areas.
After a series of suicides in Andhra Pradesh, allegedly due to the coercive recovery methods resorted to by some MFIs, the state government issued an ordinance on 15 October seeking to check such measures, prohibiting MFIs from taking their business to doorsteps, giving multiple loans to borrowers and collecting weekly payments.
As a consequence of the ordinance, MFIs with significant exposure to Andhra Pradesh found it difficult to not only collect repayments on time but disburse fresh loans as well.
According to Crisil, collections in Andhra Pradesh have “plummeted below 20% from nearly 99% prior to the ordinance”, and this, it expects, will lead to a sharp increase in delinquencies for MFIs that have a significant exposure in the state. Fresh disbursements in Andhra Pradesh have been negligible over the last few weeks and disbursement growth in other states have also fallen sharply.
Hyderabad-based SKS Microfinance, India’s largest and only listed MFI, has seen its shares drop 36.79% on the Bombay Stock Exchange (BSE) since 15 October, while the bourse’s benchmark Sensex has fallen 0.83%. As much as 26% of SKS’ loan portfolio is in Andhra Pradesh. “We believe we are in a better position than others to face the situation in Andhra Pradesh as we have secured Rs.380 crore of debt from eight banks, and have a line of credit of another Rs.2,500 crore. The issue that Crisil has raised is valid but we see hope for the sector following the finance minister’s remark that the government’s objective is not to strangulate the sector,” an SKS spokesperson said.
Finance minister Pranab Mukherjee made the statement last week at the Hindustan Times Leadership Summit. In a notice to the stock exchanges dated 9 November, SKS said the ordinance would have a “material impact” on operations in Andhra Pradesh.
Even MFIs that have little or no exposure to Andhra Pradesh agree that credit from banks may dry up until there is clarity on the future course of action. P.N. Vasudevan, managing director of Equitas, stated that banks were likely to wait until the regulatory framework for MFIs is drawn up by the central government.
“Till now, the government has tried to regulate the liabilities side of MFIs. Now they are trying to regulate the asset side. Until the regulatory uncertainty is over, both banks and MFIs are going to be cautious in their lending practices,” Vasudevan said.
Vasudevan also clarified that Equitas continued to get support from its lenders
as its exposure to Andhra Pradesh was minuscule, around 2.5% of its total loan book size. “Even as we look to grow, we will exercise caution,” Vasudevan said.
“Banks have been lending to MFIs because they were creditworthy. Given that rating agencies have put them under watch, this will definitely have an impact on bank lending to this sector,” said Arun Kaul, chairman and managing director of UCO Bank.
Ujjivan, which has no exposure in Andhra Pradesh, has contested its name
being included in the “rating watch” list. “It is ridiculous that Ujjivan’s name is on that list as neither do we have exposure in Andhra, nor do we face any liquidity problem. We haven’t been rated recently by them and have asked them to take our name off that list after following a due process,” said Samit Ghosh, managing director of Ujjivan.
Ghosh, however, agreed that the developments in Andhra Pradesh and its consequences have posed a systemic problem for micro credit lenders to deal with.
“Banks are taking a cautious approach to lending. Fortunately, we have some unutilized limit with Small Industries Development Bank of India (Sidbi), which will help us in the next two to three months,”
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