The loan repayment plan of microfinance institutions (MFIs), which opted to restructure their debts, may collapse as the ground situation in Andhra Pradesh refuses to improve.
Top executives of a few microfinance companies expressed doubts in their ability to repay loans as recovery rate continues to remain muted due to curbs imposed by the Andhra government.
“The Act passed by the state government has not been repealed yet. We are not able to recover the money we lent. In this situation, it’s difficult to repay the bank loans,” said chief executive officer (CEO) of a microfinance company that restructured debts in 2011. The executive did not want to be named.
In October 2010, the state government passed an ordinance to curb microlending activities.
The government said it was necessary to regulate MFIs as many microlenders were using coercive methods to recover money from poor borrowers.
The legislation affected loan recoveries and eroded profitability of MFIs. A study revealed almost one in every three borrowers did not repay their loans to microlenders since the ordinance was passed.
“In Andhra Pradesh, given the fact the state law is still there, the ground situation remains unchanged since October 2010. The outstanding loan portfolios of microfinance firms are still unpaid. A large part of these portfolios had to be written off because of new regulations. As a result, many microfinance companies now have negative net worth,” said Alok Prasad, CEO of Micro Finance Institutions Network.
Mounting losses forced several microlenders to restructure their bank loans. While many applied, banks agreed to restructure loans of only seven MFIs — five in 2011 and two in 2012 — based on their revival prospects. These firms had borrowed around Rs 6,000 crore from banks.
The microlenders were given a repayment moratorium of one-to-two years. “For four microfinance companies, the moratorium got over in April 2012. Another will start repaying its loans from June 2013. But since we are neither able to lend or recover our money, it’s becoming difficult for us to repay bank loans,” said a senior executive of another MFI, also on condition of anonymity.
Microlenders were hopeful of recovery, when the Reserve Bank of India (RBI) decided to regulate the sector. The central bank introduced a new set of norms for the sector in December 2011 and modified it a little in August 2012. But uncertainty remains as there is still lack of clarity on whether RBI is the sole regulator of the microfinance sector. The final hearing on petitions filed in the Andhra Pradesh High Court challenging the state government’s actions happened in November 2012 but the judgment is pending. “The survival of MFIs depends on this judgement. We are eagerly awaiting the court’s decision,” Kishore Kumar Puli, CEO of Trident Microfin, said.
The Micro Finance Institutions (Development and Regulation) Bill, 2012 that proposes RBI as the regulator of the sector is currently being examined by a parliamentary standing committee. “We were hoping to get legal redressal quickly. But our hopes have been belied,” said an industry player.