Debt waiver rumours add to MFIs' woes

Repayments have been severely impacted in western part of UP, pockets of Maharashtra

Even as the after-effect of demonetisation continues to plague disbursements in microfinance institutions (MFIs), repayments have taken a hit for a different reason. Rumours of debt waiver in some states is leading to defaults in the sector.

According to the Microfinance Institutions Network (MFIN) data, available till December 15, repayments collection by MFIs stood at 84 per cent, against the general mark of 99 per cent, in the aftermath of demonetisation. 

The states in which rumours of debt waiver have led to defaults are Maharashtra, Madhya Pradesh, Uttarakhand, Karnataka and Uttar Pradesh (UP), though after rigorous advocacy programmes, the situation is slowly improving, said Ratna Vishwanathan, chief executive officer, MFIN.

The Reserve Bank of India (RBI) has written to the chief secretaries of these states to prevent the matter from escalating, according to Vishwanathan. Repayments have been severely impacted in the western part of Uttar Pradesh and pockets of Maharashtra; in certain pockets repayments have come down by 20 to 30 per cent.

Varanasi-based Utkarsh Microfinance, which has major portfolios in eastern UP and Bihar, too has seen defaults in western UP. 

“Most of the challenges were because of unavailability of cash and local politicians taking advantage of the situation. In particular, we had challenges in Maharashtra, in the Amravati belt. In western UP there were defaults. We have some problems in adjoining areas of western UP, in Uttarakhand, due to spill-over effect. In these areas the repayments have come down to 40-45 per cent, while in pockets of Maharashtra defaults are close to 25 per cent,” said Govind Singh, managing director, Utkarsh.

“People, who have vested local interests keep telling our clients not to pay back. Western UP is very badly affected. Slowly, it has started to come back to normalcy. Mostly local politicians and people with aspirations in politics have been fuelling the rumours. We have trouble spots in Madhya Pradesh and parts of Maharashtra like Amravati, Solapur and Kolhapur,” said Vishwanathan. According to R Baskar Babu, chief executive of Suryoday Micro Finance, repayments in parts of Maharashtra have come down to about 25 per cent. 

Another reason for defaults lies in the misinterpretation of a RBI circular, which gave MFIs an additional 60 days to recognise a loan as sub-standard dues payable between November 1 and December 31 in the aftermath of demonetisation. With repayments badly impacted in the first few days after demonetisation, RBI had granted the dispensation to save MFIs from making large provisions on account of temporary defaults. “The defaults have been somewhat fuelled by misinterpretation of prudential norms of lending,” said Vishwanathan.