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Crisis situation in Andhra Pradesh refuses to die down
It all started with MFIs creating an unrealistic growth machine out of a simple idea pioneered by Bangladeshi economist turned banker for the poor Prof. Md. Yunus. SKS has rocked the stock market with unprecedented IPO, made the promoter, some employees and individual investors millionaires and billionaires overnight. Everyone took it by surprise including the central bank, government of India and most of all Andhra Pradesh politicians and media.
Andhra Pradesh which is the most penetrated market and home to some of the oldest and largest MFIs is not new to microfinance controversies. State government runs a well acclaimed SHG-bank linkage program and rivals private microfinance business in terms of outreach and impact. State government and MFIs have a track records of taking each other head-on since 2006 when one of the district administrators slammed on MFI offices for alleged coercive practices. The situation came back to normalcy after the central bank intervened and MFIs pledged to behave. Since then there have been minor difficulties here and there primarily driven by political motives. There were also cautionary reports of over-indebtedness and irrational exuberance that were brushed aside by the industry time and again. In October 2010 a big rock fell on the industry's head that seems determined to crush the egos of MFIs and wipe out some of them completely. MFI Ordinance 2010 which is about to become a law in a short while restricts microfinance activities so much that no MFI loans have been disbursed since the ordinance came into force. The government alleges MFIs of abetting suicides of borrowers due to over-lending and harsh collection methods. There is no established evidence to prove this but government and political interests did not want to waste a golden opportunity to show down on MFIs that began threatening the government run SHG program and also the existence of moneylenders who have strong political backing.
SKS shares plummeted to all time low on 18th Nov to less than 50% issue price and then took up some marginal gains thereafter to settle around Rs. 700 mark which is some 40% below the issue price. I don't have any sympathies for the investors and stockholders for this consequence though. I think SKS is paying for it's deeds. What is more concerning are other developments that seem to aggravate by the day and inaction by authorities.
Repayments are less than 10% since the Ordinance was promulgated. Banks froze funding to MFIs, not just in AP but all over India. New equity investments are nowhere to be seen. MFIN, the industry body, is in the process of putting together an emergency funding facility that shows no signs of fruition and the poor slog as a result of this for the lack of adequate credit. They chose not to pay back loans thus resorted to mass defaults.
If the situation continues there is no doubt that more than 50% MFIs, mostly smaller ones will have to shut down or merge with non-AP MFIs to survive. Merger is not an issue, rather a good thing, but this will come at a huge cost. Credit discipline that was built by the sector in a decade and half took a bad beating in the state and could spread beyond borders.
Central bank has appointed a sub-committee to look into the matter and bought itself three months time. Government of India says microfinance bill is in the offing but wanted to wait until central bank's committee submits report. Going by the government's efficiency standards the bill might take at least a year to see the light of the day. Last bill took four years before being quashed. What surprises everyone is why the central bank is so laid back about this whole situation. This crisis is putting public funds of about $5 billion that banks lent out to MFIs under huge risk. Perhaps it will eventually bail out banks but at whose expense? Why is no one interfering in AP and trying to bring the situation under control. This will remain a mystery at least for now.
The state government seems to be heading for mid-term election given the state of affairs. Chief Minister has been replaced and opposition parties are gearing up. If elections are declared microfinance industry will have no saving grace at least in foreseeable future.
Andhra Pradesh which is the most penetrated market and home to some of the oldest and largest MFIs is not new to microfinance controversies. State government runs a well acclaimed SHG-bank linkage program and rivals private microfinance business in terms of outreach and impact. State government and MFIs have a track records of taking each other head-on since 2006 when one of the district administrators slammed on MFI offices for alleged coercive practices. The situation came back to normalcy after the central bank intervened and MFIs pledged to behave. Since then there have been minor difficulties here and there primarily driven by political motives. There were also cautionary reports of over-indebtedness and irrational exuberance that were brushed aside by the industry time and again. In October 2010 a big rock fell on the industry's head that seems determined to crush the egos of MFIs and wipe out some of them completely. MFI Ordinance 2010 which is about to become a law in a short while restricts microfinance activities so much that no MFI loans have been disbursed since the ordinance came into force. The government alleges MFIs of abetting suicides of borrowers due to over-lending and harsh collection methods. There is no established evidence to prove this but government and political interests did not want to waste a golden opportunity to show down on MFIs that began threatening the government run SHG program and also the existence of moneylenders who have strong political backing.
SKS shares plummeted to all time low on 18th Nov to less than 50% issue price and then took up some marginal gains thereafter to settle around Rs. 700 mark which is some 40% below the issue price. I don't have any sympathies for the investors and stockholders for this consequence though. I think SKS is paying for it's deeds. What is more concerning are other developments that seem to aggravate by the day and inaction by authorities.
Repayments are less than 10% since the Ordinance was promulgated. Banks froze funding to MFIs, not just in AP but all over India. New equity investments are nowhere to be seen. MFIN, the industry body, is in the process of putting together an emergency funding facility that shows no signs of fruition and the poor slog as a result of this for the lack of adequate credit. They chose not to pay back loans thus resorted to mass defaults.
If the situation continues there is no doubt that more than 50% MFIs, mostly smaller ones will have to shut down or merge with non-AP MFIs to survive. Merger is not an issue, rather a good thing, but this will come at a huge cost. Credit discipline that was built by the sector in a decade and half took a bad beating in the state and could spread beyond borders.
Central bank has appointed a sub-committee to look into the matter and bought itself three months time. Government of India says microfinance bill is in the offing but wanted to wait until central bank's committee submits report. Going by the government's efficiency standards the bill might take at least a year to see the light of the day. Last bill took four years before being quashed. What surprises everyone is why the central bank is so laid back about this whole situation. This crisis is putting public funds of about $5 billion that banks lent out to MFIs under huge risk. Perhaps it will eventually bail out banks but at whose expense? Why is no one interfering in AP and trying to bring the situation under control. This will remain a mystery at least for now.
The state government seems to be heading for mid-term election given the state of affairs. Chief Minister has been replaced and opposition parties are gearing up. If elections are declared microfinance industry will have no saving grace at least in foreseeable future.
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