Connecting microenterprise practitioners in a global learning community

Microfinance Developments in India

It is about a month since Andhra Pradesh Microfinance Institutions Ordinance 2010, http://indiamicrofinance.com/wp-content/uploads/2010/10/Andhra-MFI-... came into force. To be precise the ordinance was signed by the state governor on Oct 15th 2010 and was enforced from the following Monday Oct 18th. The sector began facing the downturn steadily since then with difficulties in loan
collection and drying up liquidity.

Through this blog space I intend to update the members with important developments and related articles along with my comments on a daily basis. Please feel free to post your comments as you deem fit.

1. Microfinance Institutions Networks (MFIN) plans on setting up a $220 million emergency liquidity facility to fund MFIs.
http://news.in.msn.com/business/article.aspx?cp-documentid=4586730

“The association is currently in talks with Small Industries Development Bank of India (Sidbi), ICICI Bank, State Bank of India (SBI) and few other banks for creating the emergency fund'. MFIN hopes to raise this corpus by next month “

I think this is a very smart move and should be supported. The interesting part though is that on the one hand the Indian banks are refusing (see the new piece below) to lend more funds to MFIs, wary of the fall outs from the impending crisis, and on the other MFIN is trying to convince the same banks to help with emergency funds. Sadly enough Indian External Commercial Borrowing norms do not permit non-bank finance companies (most large MFIs are registered as NBFCs) to borrow from foreign sources, except through instruments such as NCDs. Any foreign funds used to on-lend to NBFCs would also be treated under the same rubric. While the initiative would be a lifesaver and is much appreciated it would be good to watch and learn how they will manage to arrange that kind of money in such a short time and under existing constraints.

2. Banks refuse new loans to MFIs http://www.thehindubusinessline.com/2010/11/18/stories/201011185298...

“There is also a fear among some banks that a similar situation could happen in other States, which is not totally baseless. There have been enquiries from the Governments of Orissa and Tamil Nadu on our recent Ordinance,'' said a senior Govt official.

If this spreads to other states, particularly Orissa and Tamil Nadu, two other highly penetrated states, more than 50% of the industry would be under stress. That would only make the fears of collapse even more real. Reserve Bank of India should step up and help MFIs with liquidity but this is unlikely to happen given the political ire the sector has attracted in past weeks and months. Nobody wants to touch the politically sensitive subject
at the moment and as the time passes by the sector’s ship is in danger of sinking more and more.

3. India’s microcredit sector faces collapse from defaults – NY Times

http://www.nytimes.com/2010/11/18/world/asia/18micro.html?_r=1

“The crisis has been building for weeks, but has now reached a critical stage. Indian banks, which put up about 80 percent of the money that the companies lent to poor consumers, are increasingly worried that after surviving the global financial crisis mostly unscathed, they could now face serious losses. Indian banks have about $4 billion tied up in the industry, banking officials say.”

“Now some Indian officials fear that microfinance could become India’s version of the United States’ subprime mortgage debacle, in which the seemingly noble idea of extending home ownership to low-income households threatened to collapse the global banking system because of a reckless, grow-at-any-cost strategy.”

The industry is too big to ignore today, although not too big to fail! Banks have significant exposure in the sector and contributed to unprecedented levels of financial inclusion through MFIs and SHGs. These efforts have been clearly overdone in some cases leading to situations of distress among some borrowing families. But one should note that MFIs reach more than 5 million families in AP alone and while some amount of wrongdoing for the want of profits and growth cannot be denied, it is nothing less than throwing the baby out with bath water when one starts comparing the current crisis with US sub-prime. The similarities stop at the nature of clients. The lending methods, purpose of loans and most importantly competing state interests do not figure in US story. There was hardly any over-leveraging and securitization of loans (<10%) which primarily caused sub-prime mess. The governments also reacted very differently in both cases. In US government attempted to bail out banks whereas in AP government chose to stifle the industry.

Stay tuned for more updates tomorrow!

Comment

You need to be a member of SEEPCommunity to add comments!

Join SEEPCommunity

Comment by Sasidhar Thumuluri on November 19, 2010 at 11:54pm: 11.19.2010

Not much action except that the Finance Minister assured about keeping the sector alive, Andhra govt. filed a counter petition in the high court and SKS shares bounced back sightly after its Chief assured the market of its liquidity position.

1. Finance Minister says, no intention to strangulate MFIs

This is a good news amidst the gloom. To be fair, federal government has been soft with the sector although it did express concerns right after SKS IPO about MFI interest rates but stayed out of AP issue by far. Some would argue, and I agree, that staying calm over the ordinance was not a good strategy. Federal govt could have intervened and helped soften the impact on the industry. RBI is taking a bit too long to resolve the issue as well.

2. Andhra Pradesh government files counter petition in the high court
The AP government in its counter petition to the high court yesterday claims that the ordinance was passed to protect the interests of the poor. It says MFI field officers forced clients to commit suicides in the name of insurance. This sounds a bit too off the line since state officials should know that life insurance. It is however possible that some rogue loan sharks who fashion themselves as MFIs might have used this trick since they may not be aware of the terms of the insurance and might have expected to recover their money from insurance settlements these clients would get from MFIs. Well that is just an assumption though. On the whole, government has not produced any evidence of direct link between deaths and MFIs. The court seems to have adjourned the hearing to Nov 29th. This battle might take several months anyways. The news item says AP govt consulted with MFIs before releasing the ordinance which is not true.

3. SKS shares bounce back post confidence building measure by management
SKS Chairperson and Founder Vikaram Akula and CFO Dilli Raj assures in a TV channel interview assured that all's well with the company and it is too early to assess the implications of AP crisis on its financials. They expressed confidence that the impact whatsoever would not be material and the company can weather the storm and emerge stronger. They claim that banks continue to fund them and they hope to grow close to 100% this year too. They hope to achieve greater productivity and efficiency owing to scale even after reducing the interest rate to 24.5% from 26.7%.

All the statements may be true except about the impact of AP on company's bottom line. Indications from the field is that repayments are as low as 5% in AP and if this continues for a bit longer, all the MFIs would have to write-off huge sums. SKS might have to write off as much as $100 million. That would leave the company in loss, although not wipe it out. They might try to acquire other non-AP MFIs to cover for some of these losses if need be.

You may the exclusive show on CNBC TV18

Comment by Sasidhar Thumuluri on November 19, 2010 at 12:10am: Here are some new updates:

1. SKS Microfinance stock plummets 20%

This was not unexpected but the irony is that the industry has seen a boom and witnessing a bust within one quarter. SKS's peril began when their CEO was fired under suspicious circumstances and heightened when Andhra Crisis began unfolding. Some would even argue that SKS is the primary reason for the ongoing mess. The kind of money promoter, employees and investors made is mind boggling and raised eyebrows of politicians and bureaucrats who were waiting on the wings for an opportunity to crack down on this incredibly growing industry threatening government's own SHG-led microfinance program.

2. Vijay Mahajan's interview with National Business Newspaper MInt:

Vijay Mahajan, MFIN president and chairperson BASIX and CGAP, is one person who, despite being the pioneer of Indian commercial microfinance which is under fire right now, is well respected and genuinely cares about the industry. He cautions that if the liquidity crunch continues some smaller MFIs may be forced to merge with larger ones. Banks seem to be adopting wait and watch approach before sanctioning new loans to MFIs, understandably so.

3. BSE Banking index down due to MFI woes

Another bad news from stock market. Banks that have big exposure to MFI loans are also facing the pinch as the fears of impending crisis spread among investors. No wonder banks are cautious about further exposure to microfinance.

4. Andhra Pradesh Financial Crisis Threatens to Snowball into a Nation...

In this well researched and analyzed article two leading microfinance professionals argue that AP government has flouted basic democratic tenets related to the fundamental rights of its citizenry and sought to step on the toes of Indian central bank which already regulates 85% of the industry. They also express surprise that the central bank is quite about all this as the industry stands at the brink of collapse and caution that there is a danger of contagious effects, if the issue a hand is not addressed soon.

5. Orissa Government forms panel to monitor Micro Finance Institutions

As predicted by Nachiket Mor and Bindu Ananth in the above article, other state governments began taking note of the developments in AP and making moves. This particular case is not too bad though. The state government commissioned a study to understand MFI practices and report to the central bank. Wisdom prevailed among bureaucrats in this state apparently. The very fact that other states are waking up is not bad but some state governments may also end up taking extreme steps like AP, creating a cascading effect across the country. That is the fear.

Stay tuned for more stories tomorrow!