AP MF Crisis

8/13/2019 AP MF Crisis

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Andhra PradeshMicrofinance 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 lowincome group and poor customers

• Services offered are Credit facility, Savings Accounts, Moneytransfers, 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 3years 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

Supply Demand

Regulation

Intermediation



MFI Growth Spurge

• Asia has been leading the global exposure to microfinance.

• In 2010, around 74 million borrowers were based in Asia (Microfinance Inform2012).

• 7 out of every 10 of such borrowers live in India

• Over the past decade India has become the most dynamic country for microfin

• 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 m

• 90% of it was concentrated in just 2 states: Andhra Pradesh and Tamil Nadu.



•Andhra Pradesh the “Mecca ofMicrofinance” in India has the highestpenetration rates than any other statein India.

•Several of India’s largest MFIsincluding SKS, Spandana, BASIX are

based in Andhra Pradesh and beganoperations in the state

•The state is home to India’s largeststate-led microfinance initiative – theVelugu program.

Microfinance In Andhra Pradesh



Krishna Crisis

• India’s five largest MFIs (SKS,BASIX, Spandana, Share, and Asmitha) were heaAP

• Substantial exposure to the state.

• A significant clash of ideology between the for-profit MFIs and the state-run SHprogramme.

• First tension surfaced in 2006, when Govt. clamped down on two large MFIs –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 one’s 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 inPradesh 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 acommencement 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



•No MFI to operate without Registration

•Registering Authority to conduct Verification and can cancel the registration provided to theInstitution

•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 fo

•All MFIs shall display the rates of interest charged by them in a conspicuous place in their pletters visible to the members of the public




•No MFI shall extend a further loan to a SHG or its members, where the SHG has an outstanda Bank unless the MFI obtains the prior approval in writing in such manner as may be prescr

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 giving therein the list of borrowers, the loan given to each and the interest rate charged on th

made.

•Fast Track Courts to be formed to settle the disputes.




•All persons who resort to any type of coercive measures against the SHGs shall be liable for

of imprisonment up to a period of three years or with fine which may extend to one lakh rup both.

•The Government may, from time to time, issue such orders, instructions and directions not iwith the provisions of this Ordinance

•

The Government shall prepare an annual report on the administration of this Ordinance andshall 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 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 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 t backfired because it drew attention to what were publicly perceived as very hirates.



The Malegam Committee• The Board of Directors of the Reserve Bank of India, at its meeting hel

October 15, 2010 formed a Sub-Committee of the Board to study issueconcerns 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 aris

number of reasons

1. The borrowers in the Microfinance sector represent a particularly vulnerable sectisociety

2. NBFCs operating in the Microfinance sector not only compete amongst themselvedirectly compete with the SHG-Bank Linkage Programme

3. Credit to the Microfinance sector is an important plank in the scheme for financia

inclusion

4. Increasing exposure of banks



Areas of Concern• Between 31st March 2007 and 31st March 2010, the number of outstan

accounts serviced by MFIs is reported to have increased from 10.04 mimillion

• The outstanding loans have increased from about 3800 crores to 18,34

• 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 increasin

• Investors that paid dearly for shares in the MFIs, they need fast growth to make thpay off.

• Public sector policy environment that has treated microfinance institutions as orphthe 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 parownership and governance.



Diagnosis

•

Microlending rather than micro finance crisis

• Demand side complication:

Financial inclusion has proceeded too quickly for (mostly poor) individuals wfinancial literacy

• Supply side complications:

1. Large growth in supply of (relatively cheap) loans

2. Regulatory failure regarding institutional structure and enforcement techn

3. Inappropriate one-size-fits-all approach to lending by the microfinance com



Post Crisis Focus

• Attention on modifying specific lending behaviors: restraining growth, instilling beprotection practices, developing credit bureaus.

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

• Welcome the contribution MFIs can make to reaching the poor with financial servi

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

• Make a scenario where we could talk about sharing the credit rather than the blam



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 th• To overcome the problems of multiple lending and over-indebtedness, we are

records to the credit bureau as mandated by RBI.

• Nearly 100 per cent of our records are now available with the two credit bureaand High Mark Credit Information Services Ltd.

• All MFIs now refer to the borrowers’ credit history before taking a lending dec

• This apart, a code of conduct has been deployed for the industry and is being amonitored by the Microfinance Institutions Network (MFIN).

• As per the code of conduct, all MFIs have to ensure transparency in interest ratfee and other terms and conditions pertaining to any credit extended.

• They are also mandated to provide these terms and conditions in vernacular lasked 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 interactionlending techniques and the outreach vs. sustainability issue

• Researching features of indigenous financial institutions and linking them withmicrofinance

For Policy:

• Governments should be careful with drastic ex-post interventions when develoeconomic sector

• Current Microfinance Crisis shows no indication of a flaw fatal to the system, bneed for gradual improvement of the regulatory framework



Thank You

AP MF Crisis

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