MFI woes persist despite debt recast, Malegam proposals

Most microfinance companies in India continue their struggle for survival. This is despite banks agreeing to recast the existing debts of micro-lenders and the Reserve Bank of India (RBI) adopting the broad recommendations of the Malegam committee on regulating the sector.

The situation at the ground level remains grim. The legislation imposed on the microfinance sector by the Andhra Pradesh government continues to affect loan recoveries and erode the profits of microfinance institutions (MFIs) in the state. Banks have dismissed micro-lenders' pleas for additional loans, which, the MFIs claimed, was critical to sustaining their business. Even private equity investors, who own sizeable stakes in many microfinance companies, have refused to increase their investment in the sector until the regulations are clear.

“It is important to understand that the reason for this crisis, and the related debt restructuring, is the Andhra Pradesh Microfinance Act, and not the MFIs, their promoters or the banks who have lent money to MFIs,” said Mark Stoleson, chief executive officer, Legatum, a multi-billion dollar global fund that manages proprietary capital. The fund is also a majority shareholder in Share Microfin, a Hyderabad-based microfinance company.

“Legatum believes in order for debt and equity capital to once again flow into the microfinance sector, any ambiguity in the regulatory framework must first be addressed. The Andhra Pradesh Microfinance Act should be urgently repealed and RBI must re-establish its authority as the regulator of non-banking financial companies,” Stoleson said.

While RBI had adopted the broad recommendations of the Malegam committee on regulating the microfinance sector with effect from April 1, investors remain worried. This is because the Andhra Pradesh government has persisted with its law that affected the microfinance companies in the state.

“At the ground level, the situation has not improved. Recoveries are still not happening. As a result, investors and lenders are scared to provide additional funds to us,” said a senior official of Trident Microfin, a Hyderabad-based microfinance company that opted for debt recast.

“Banks are not lending to MFIs. In our discussion with banks, they had promised us once the guidelines (on regulating the MFI) sector are finalised, they would give loans. But banks' promises, you know...,” RBI Deputy Governor K C Chakrabarty had said in a conference last week.

Barring a few large ones like SKS Microfinance and Bhartiya Samruddhi Finance, most microfinance companies in Andhra Pradesh are currently facing a liquidity squeeze. According to officials of microfinance companies, banks have promised to offer fresh loans if the situation improves in six months. “It is difficult to continue our business in an environment like this. If we don't get additional funds soon, we may have to shut shop,” said a senior official of a microfinance institution in Andhra Pradesh. The official requested anonymity, since he was currently negotiating with banks for additional funds.