A quarter of microfinance institutions (MFIs) may fail after a clampdown last month in their biggest market pared debt payments and curtailed bank financing, said N Srinivasan, who consults on the industry for the World Bank.
As many as 60-70 of the 260 MFIs are likely to collapse in coming months, as banks halt lending to them to curb risks, Srinivasan said in an interview on November 19 in New Delhi. That would have a “devastating effect” on the poorest borrowers in remote regions, he said.
Lending and collections by micro-lenders have ground to a near halt in southern Andhra Pradesh after the local government introduced new rules in mid-October aimed at protecting borrowers. A slump in microfinance loans might trigger a chain reaction of defaults by borrowers with multiple debts, Srinivasan said.
“Multiple loans help people manage money, like juggling balls,” he said, adding every poor household in Andhra Pradesh has 9.6 microfinance-loan accounts on average. “What’s happening is that right in the middle of it, you remove a ball. Suddenly there is no ball to throw.”
Andhra Pradesh, the largest market for most micro-lenders, on October 15 capped interest rates that companies can charge and ordered them to collect payments monthly rather than weekly. It also barred them from using coercive measures to force borrowers to repay debt.
The move led to a slump in micro-lenders’ cash flows, strained capital levels and spooked banks, which account for most of their funding needs. MFIs were seeking Rs 1,000 crore ($221 million) from banks for a liquidity fund, Vijay Mahajan, head of a lobbying group that represents about 44 micro-lenders, said on November 16 in New Delhi.
The new rules sent shares of SKS Microfinance, the largest such lender in the nation, plummeting 47 per cent before Chairman Vikram Akula said on November 19 that the company had received bank funding and didn’t have a cash shortage. The comments helped shares of SKS, more than a quarter of whose loans are in Andhra Pradesh, rally 5.4 per cent that day.
Rival Share Microfin, backed by New Zealand billionaire Christopher Chandler, plans to delay an initial public offering until customers restart payments and state and central governments deal with the current upheaval. Banks need to regain confidence in the companies’ operations, M Udaia Kumar, managing director, said in a November 18 interview.
“Even if a single MFI defaults, it might have a trickle-down effect on the entire sector,” he said. “Institutions with stronger net worth have a possibility of survival for a period of time.”
Share Microfin, based in Hyderabad, had planned to raise Rs 1,000 crore in early 2011.
Microfinance, which focuses on loans in poor areas largely shut out from traditional banking services, gained prominence globally when Muhammad Yunus won the Nobel Peace Prize in 2006 for his role in founding Bangladesh’s Grameen Bank. India, where banking services are available in about five percent of cities and towns, is the largest market for such credits.
India’s micro-lending has expanded at an average annual rate of 62 per cent over the past five years in terms of number of customers, and 88 per cent in terms of credit, according to Micro-Credit Ratings International, a Gurgaon-based ratings agency for the industry.
A shortage of microfinance funding might force borrowers to turn to moneylenders, said Dipak Gupta, executive director of Mumbai-based Kotak Mahindra Bank. These unauthorised lenders operate outside the formal credit-delivery system and charge usurious interest rates.
“Money has stopped and a borrower is used to getting that money and circulating it,” he said. “If you don’t create an alternate system or don’t allow the system to rotate, he will go back to the moneylender.” SKS, whose stakeholders include George Soros, has received Rs 367 crore from eight lenders including Axis Bank in the past two weeks, Chief Financial Officer (CFO) Dilli Raj said on November 19 from Hyderabad, where the company is based.
Axis Bank, India’s fourth-largest lender by market value, is awaiting a report by a committee set up by the central bank last month to review concerns about the microfinance industry, CFO Somnath Sengupta said.
The report, due in January, “will be the guiding principles for lending to the sector,” he said in an interview on November 19. “We will continue to be prudent. There is no reason to panic.” Axis Bank’s loans outstanding to MFIS account for about one percent of the total, he said.
Still, the industry was bracing for consolidation, said Mahajan, who is also chairman of Hyderabad-based MFI Basix Group.
“We could see casualties among small MFIs,” he said.