Q&A: Alok Prasad, CEO, MFIN

'MFI industry shrunk by Rs 10,000 cr in 11 months'

The size of the Indian microfinance sector is shrinking fast, following the crisis the sector saw in Andhra Pradesh, the largest market for micro-lenders in the country. Micro Finance Institutions Network chief executive, Alok Prasad, in an interview with Somasroy Chakraborty, talks about the current state of affairs in the sector. Edited excerpts:

After the crisis in Andhra Pradesh, a slew of measures have been announced to improve the condition of the microfinance industry. How effective have these been?
The only new regulation in place since the Andhra Pradesh government's ordinance in October 2010, is the circular issued by the Reserve Bank of India (RBI) on May 3 that defines what qualifies as priority sector lending. The Malegam committee made a number of recommendations. But their implementation is dependent on RBI's final view. In Andhra Pradesh, repayments are still not taking place. For fresh disbursals, microfinance companies need no-objection certificates (NOCs) from the government. Securing NOCs is cumbersome and tedious. Hence, lending by microfinance companies in Andhra Pradesh has come to a standstill. Many large microfinance institutions have opted to restructure their bank loans. While this would reduce the stress on their cash flow in the near-term, it would only help them buy some time. The critical issue is normalisation of ground-level activities. The biggest tragedy is low-income households in Andhra Pradesh are now increasingly borrowing from moneylenders at exorbitant rates.

Micro-lenders have proposed to restructure their loans to small borrowers in Andhra Pradesh. Has the government accepted the proposal? How soon would it be implemented?
The crisis has affected the access poor people had to formal funding. Banks have, so far, not been able to fill the credit gap in rural centres. Our dialogue with the state government has been constructive. We remain hopeful of a satisfactory resolution soon.

Are banks still lending to microfinance firms?
Banks are still cautious in lending to the microfinance sector. Without fresh funding, the industry is shrinking. Microfinance institutions are repaying existing loans to banks, according to their contractual obligations. But without fresh lending by banks, the industry would remain in a crisis mode. The compound annual growth rate of the industry was around 70 per cent during 2005-2010. But in the last one year, the industry’s size has declined to around Rs 20,000 crore from Rs 30,000 crore in October 2010.

Have small micro-lenders started closing their business? Do you foresee some players merging their businesses in an effort to survive?
Smaller microfinance institutions are finding it difficult to continue operations. However, I’m not aware of any specific case in which a microfinance firm announced the closure of business. But a comatose business is, for all practical purposes, no business at all. To remain profitable, microfinance institutions would need scale, particularly because of regulatory caps on margins and the prevailing interest rates.