Reserve Bank of India (RBI) Deputy Governor K C Chakrabarty on Tuesday blamed the failure of microfinance institutions in Andhra Pradesh to their inability to provide loans in sync with customers’ capacity to repay.
Microfinance institutions in Andhra Pradesh failed because they had not assessed the credit needs of the people properly, Chakrabarty said in a speech at the Visa-Financial Times conference on financial literacy on Tuesday.
Chakrabarty said financial institutions that did not assess clients’ credit requirements, and also their ability to repay loans within the required time frame, were only working to digging your own grave.
The deputy governor’s comments added another dimension to the role played by microfinance institutions in the failure of their business in Andhra Pradesh,along with the pressure of laws enacted by the state.
At one point, Andhra Pradesh contributed 40 per cent of the total portfolio of microfinance business in the country but following the passage of The Andhra Pradesh Microfinance Institutions (Regulation of Moneylending) Act, 2010,nearly all microfinance activity in the state has come to a halt.
Microfinance institutions in Andhra Pradesh were compelled to shut down operations as recovery levels in the state fell to below 10 per cent from a high of 98 per cent before the Act was enacted.
Most microfinance companies wrote off nearly all their loans after the law imposed caps on loan rate, restricted multiple loans, stressed on self-help group direct lending, and curbed recoveries by microfinance companies’ credit officers.
The law had come into place as the rapid growth in the sector and the hugely successful initial public offering of SKS Microfinance, the only listed microfinance entity, had been overshadowed by reports of debt related suicides and strong-handed recovery practices.
The Union government, in May, introduced a microfinance Bill in Parliament, aimed at bringing uniformity in regulations across the country and also bring these institutions under the purview of RBI.
RBI has also approved most recommendations of the Y Malegam committee on microfinance that sought to streamline the working of microfinance institutions and also bring out uniformity in their regulatory treatment.