Last October, when local pressure groups in Assam began demanding a ban on microfinance activities in the state, it seemed like a throwback to the yesteryears for the veterans in the business.
The issue of over-indebtedness came back to haunt the industry exactly a decade after the controversial Andhra Pradesh Microfinance Institutions Ordinance, which clamped down on unregulated lending by micro lenders. It all started with some borrowers defaulting, and that snowballed into mass defaults in five districts of upper Assam.
The Microfinance Institutions Network (MFIN), the self regulator for the sector, found 7% borrowers in the state were over-indebted, over double the national average of 3% of 55 million customers.
“The national average is still small in the bigger scheme of things. But the risk of higher indebtedness is growing following the influx of new set of lenders. They are taking the easy way of going to the existing borrowers having credit history, instead of trying new pockets of business,” said Bandhan Bank managing director Chandra Shekhar Ghosh, India’s answer to Bangladesh’s Mohammad Yunus.
As many as 18 lenders took membership of MFIN post demonetisation, taking the tally of NBFC-MFI members to 56. All of the new members may not necessarily be entirely new to the game, but the fact that they have enrolled themselves now shows that with the impact of cash ban wearing out, they are trying to make the most in a business which offers unmatched returns.
A FREE LUNCH
Late last year, fresh trouble related to loan defaults surfaced in a couple of districts in coastal Karnataka, about 3,000 km from the Brahmaputra and Barak valley. There, some political activists had convinced borrowers that they would gain under the Karnataka Debt Relief Act of 2018 if they didn’t pay back.
“These externalities mar the sector time and again. We have no control over them. We may only have control over the concerns regarding the possibilities of overlending. MFIN is working on this issue with its code for responsible lending,” says PN Vasudevan, managing director at Equitas Small Finance Bank.
The MFIN study in Assam’s five most affected districts — Dibrugarh, Golaghat, Jorhat, Sibsagar and Tinsukia — shows that among highly indebted borrowers, 24% have taken loans from more than three lenders. About 38% of highlyindebted customers have not taken a single loan from NBFC-MFI, 41% have single NBFC-MFI as lender, 19% have taken loans from two NBFC-MFIs. Only 2% have more than two NBFC-MFIs as lenders.
Central bank rules say that not more than two NBFC-MFIs should lend to a specific borrower, while there is no bar on the number of banks lending to the same borrower. The central bank has prescribed the micro loan limit by NBFC-MFI to a single borrower at Rs 1.25 lakh, but does not put any ceiling on lending by banks or SFBs to the same borrower.
This raises doubts. There are different sets of lenders — banks, small finance banks (SFBs), NBFC-MFIs and societies — that are targeting the same borrower groups. Even as banks engaged in microfinance typically argue that they have stricter and stronger risk evaluation processes, but history teaches us that there are chances of unregulated lending over the ?1.25-lakh limit if the rules do not consider the changing contours of microfinance.
Banks have now taken the leadership in micro lending to women in joint liability groups accounting for 40% of the Rs 201,724-crore loan outstanding as on September last year. NBFC-MFIs are the second largest provider with 31% share while small finance banks and other NBFCs have 17% and 11%, respectively. Other MFIs account for merely 1% share.
Besides, there are semi-formal and informal money lenders who are also giving short-term credit to these borrowers every now and then, outside the formal economy.
“Care has to be taken by all lenders for this sensitive client base. Else, multiple lending and high indebtedness of borrowers will follow. This is why we have been pushing for uniform guidelines for all active lenders in this market segment,” says MFIN chairman Manoj Nambiar.
According to ICRA Ratings, the overall exposure to Assam by banks, SFBs, NBFCs and NBFC-MFIs has grown to around Rs 12,600 crore as on September 30, 2019, while NBFCMFI has it at Rs 2,600 crore.
ASSET QUALITY-GROWTH TRADEOFF
ICRA said that the rapid loan book growth has led to some concern on the asset quality in the region.
“Until recent months, the collection efficiency in the state had remained high with 30+dpd remaining below 1% till September 30, 2019. However, the ongoing protests and political tensions seem to have impacted MFI operations substantially, with the share of overdue portfolio (0+ dpd) increasing sharply from 1.5% in September 2019 to around 10% in December 2019,” the rating firm said in a report released in January.
Lenders typically react by slowing down loan disbursement in the pockets of trouble. Ujjivan Bank has slowed new customer acquisition in Assam, Karnataka and also in pockets of West Bengal and is serving only repeat clients with good credit history.
“Microfinance with its 7-crore plus (including self-help group borrowers) women clients is a good base for a lot of local activism. But we are moving to a scenario where making false promises, confusing the gullible clients and creating an issue with repayment will be treated as financial vandalism and attract punishment and censure,” says Nambiar.
He goes on to say that tight credit reporting discipline would ensure microfinance being available to deserving clients.
“MFIN has already taken the initiative in Code for Responsible Lending in microcredit which brings all lenders regulated by the RBI and also big not-for-profit entities under the same umbrella with a common minimum programme. What makes it more powerful is that when you sign, you get classified as a responsible lender and every quarter the designated credit bureau will publish your level of adherence — this will ensure complete transparency to all,” Nambiar says.
THE BUSINESS CODE
More than 105 lenders have so far signed the Code, with the biggest omission being Bandhan Bank.
“Financial literacy and generation of awareness are important for future success of microfinance, which more often than not is subject to local level disturbances that gullible borrowers often fall for. Unfortunately, as the sector grows, lenders are getting preoccupied with lending and repayment collections, while the focus on awareness generation is ignored,” Ghosh says.
“And, when lenders offer bonuses for making loan disbursement and repayment collections, then these are not responsible lending. MFIN needs to look at this aspect,” he says.
To be sure, there are grey areas even after a decade of the Malegam Committee report that prescribed measures to cleanse the sector. A revisit of the business parameters looks to be the order of the day.