Why microfinance crisis is still not over even 10 years after the clampdown

A large number of borrowers in the state have been marked defaulters, despite a previous record of timely payment
This year, cotton plantation has been particularly good in Vattpally, a village in the Sangareddy district in the southern state of Telangana. Cotton plucking is at its peak, and so is the demand for workers. 

Last year, Lakshmi was getting Rs 8 for plucking one kg of cotton, but this year the rate has increased to Rs 10 for a kg. At 6.30 a.m, she is already late to work. She needs to pluck at least 20 kg of cotton, as she has to earn at least Rs 200 by the end of the day. A month ago, she had  taken a loan of Rs 20,000 for the purpose of repairing a rickshaw owned by her husband. Even before the disbursement, she was charged Rs 2,000 as interest, and handed over Rs 18,000. Now she is required to pay Rs 200 daily for the next 100 days to pay off the principal. The annual rate of interest comes to a steep 41 per cent— and close to 80 per cent on a diminishing return.

As on January 2020, 3.38 million people from rural Andhra Pradesh and 2.16 million in Telangana are marked defaulters by credit bureaus. In total, nearly 5.54 million rural borrowers in the two states are least credit-worthy for any formal financial institution. Hence, Lakshmi is not entitled to any private institutional finance.

Cut to February 2010, Swayam Krushi Sangham or SKS Microfinance (which went through several avatars to merge with IndusInd Bank  recently), founded by the doyen of Indian microfinance industry (MFI), Vikram Akula, was a friendly name in Sangareddy. Women would pay an annual interest of 24-26 per cent (on diminishing return) on loans, payable in about 50 weeks, to get quick cash. Along with SKS, many other MFIs were flourishing in the state. However, unchecked by regulations, some of them were charging 70-80 per cent interest and coercing people for recovery. In consequence, at least 75 borrowers committed suicide due to intimidation by MFIs. Ultimately, in October 2010, the Andhra Pradesh government invoked the Andhra Pradesh Micro Finance Institutions (regulation of money lending) Ordinance, imposing  stringent regulations on loan recovery and disbursements by MFIs. Eventually, the sector died in the state where it was once born.

With MFIs not able to collect as much as Rs 7,000 crore in Andhra Pradesh, a large number of borrowers were marked defaulters, despite a previous record of timely payment. 

Almost 10 years after the MFI clampdown, a part of the void left by MFIs is filled by moneylenders, charging exploitative interest rates from the poor.

“Since the last 10 years, we have had a hard time getting any loan. Banks don’t give us credit, finance companies don’t come here,” says Padma, a resident of Kotwanpally village in Sangareddy.

 “After a detailed survey, we came to the conclusion that inclusive banking model in other states cannot be replicated in Andhra Pradesh and Telangana. While there are no restrictions, there are challenges. The ordinance restricts us to make microlending sustainable,” according to an official of a private sector bank.

According to regulations in Andhra Pradesh and Telangana, any private institution willing to give microloans needs to submit records of each loan to the local authority — a condition which MFIs say makes it virtually impossible to lend. Most banks and non-banking finance institutions in rural India work in microfinance group lending model, either independently or through a tie-up with an MFI.

“We need conducive environment. We don’t want to work in a situation where we don’t know how the government will react. Also, a large section of women are defaulters, and no bank would want to lend to a defaulter,” said another banker with a private sector bank.

Institutionalised money lending

Till about a decade ago, Nagesh (name changed) was a field staff at SKS, earning close to Rs 12,000 month. Today, he is one of the richest men at Naraynkhed town in Sangareddy. Five years ago,  Nagesh started his own money lending business. Every month he disburses on an average Rs 20 lakh, acquiring one customer every 10 days.

Moneylenders offer various kinds of loans, popular ones being daily, monthly and bullet financing.  While the average ticket-size of loan is about Rs 10,000, the interest rate is exploitatively high 80-85 cent (diminishing return). Under the daily financing scheme, repayment has to be done every day, while in weekly financing, it is to be done in seven days. Under the bullet financing scheme, the borrowers need to deposit gold as collateral against loans with monthly interest between 3 per cent and 5 per cent. The repayment is one time, generally after a year, but if the borrower defaults even by a day, the interest gets added to the principal and interest payment goes up. Further delay leads to the attachment of gold.

Satmala, a resident of Kotwanpally, had taken a loan of Rs 30,000 from a moneylender under bullet financing by pledging little bit of gold she had accumulated for her daughter’s wedding. She had to sell her only livelihood asset, a buffalo, to repay it. Today, she works as a daily labourer.

Some of the other conventional money lending products that are popular in Narayankhed include fertiliser loan, under which farmers are required to mandatorily set aside a portion of their crop for moneylenders, even before the harvest. The default rates are less than a per cent, as moneylenders keep a close tab on borrowers for timely repayment.

Raj (name changed), another moneylender who too used be a staff of MFI once, from Narayankhed, says there is nothing illegal about his money lending business, as he works under the aegis of an auto leasing finance firm owned by his uncle.  

 “My uncle owns an auto leasing finance firm, which allows daily collection and disbursements. So my clients get documents, but we don’t write the amount of loan and date on it,” says Raj.

Under a typical auto-lease agreement, a borrower makes lease payments on a vehicle, and in exchange the dealer allows the borrower to use the car for a certain period of time.

At Narayankhed town, it is not difficult to spot auto financing firms in close concentration. Money lending is not an illegal activity in India, but the problem lies in implementation.

“Money lending by unincorporated or unorganised moneylenders is not illegal. There have been some rulings to the effect that money lending laws do not apply to NBFCs. This may be the reason that moneylenders are working under the aegis of NBFCs. Truth-in lending and disclosure of lending practices, commonly called fair lending laws, has been a concern all over the world. The fact that usurious lending is most likely to operate for the bottom-of-the-pyramid population where there is need for protection, makes the concern really strong,” says Vinod  Kothari, a financial consultant.

“Many moneylenders could be operating under the aegis of laws governing NBFCs as it gives flexibility on disbursement and collection,” says Pooja Dutta, managing partner, Astutelaw, a law firm.

Although there is no official data or study on the extent of informal money lending in Andhra Pradesh and Telangana, MicroSave, a consulting firm found out that moneylenders accounted for a major 59 per cent of credit delivery in rural Andhra Pradesh in 2011, soon after the MFI clampdown.  

“Money lending continues to be a thriving business even in markets where microfinance penetration is deep.  Logically, if you kill the microfinance industry in a particular spot, money-lending will flourish,” says Manoj K Sharma, managing director, MicroSave Consulting, a consulting firm.

“Having a good financial product is not sufficient, as we need to have good financial penetration. No product in the formal financial system delivers instant cash, and there arises the demand for microfinance, in absence of which moneylenders grow,” he adds.

Government schemes to help MFIs

After the 2011 crisis, the government of Andhra Pradesh (then undivided) made many efforts to fill the void left by MFIs.  However, demand far outstrips the supply. Further, MFIs, and now moneylenders, meet the quick credit needs of the people without any documentation, which is not the case with government schemes.

One major initiative of the government was StreeNidhi, a state-backed credit cooperative federation to supplement credit flow from the banking sector. After the split of Andhra Pradesh, the scheme was split for Andhra Pradesh and Telangana.

According to data from credit rating agency Brickwork, the loan portfolio of StreeNidhi in Andhra Pradesh was Rs 1,110 crore in FY19.  In Telangana the scheme disbursed close to Rs 1,300 crore in FY19.

The coverage of other two sources of formal credit — Self Help Group (SHG) bank linkage and direct bank credit for agriculture loan has been quite extensive in the two states. In 2019-20, Andhra Pradesh and Telangana together accounted for the highest share of SHG-linked credit among all states at about Rs 25,000 crore. This is more than 40 per cent of total loan disbursed through SHG linkage in the country.  

“StreeNidhi was set up to bridge the gap left by MFIs. It meets a major part of credit requirement in Andhra Pradesh and Telangana. The SHG lending programme is also very strong in the two states. However, since the demand is much more, there could be gaps,” says P Mohanaiah, former chief general manager of the National Bank for Rural and Agricultural Development (Nabard), Andhra Pradesh.

In villages like Vatpally, Kotwanpally and Jagannathpur in Sangareddy, despite the growth of government-backed credit, dependence on moneylenders has increased over the years.  

“Earlier most people would take gold loans from one moneylender. Now we have four-five moneylenders in the village,” says Premlata from Vatpally.
Further, StreeNidhi loans are mostly repayable over 36 months, and unless it is repaid, new loan is not provided.

Moglammma, who runs a small food stall in Vatapally, has taken loans from both moneylenders as well as StreeNidhi. She says, StreeNidhi loan is available only once a year, while moneylenders provide credit on demand round the year.

Informal money lending has always been strong in the southern states. In 2011, Andhra Pradesh had  one of the  highest  concentration  of MFIs with 6.24 million MFI clients, according to a study by Consultative Group to Assist the Poor (CGAP). The study revealed that the average household debt in Andhra Pradesh was Rs 65,000, compared with the national average of Rs 7,700. Hence, it is an abysmal task for government institution alone to meet all the credit needs of people.

At the same time, back in 2010, the MFI clampdown was much needed. Over the last decade, the number of agriculture related suicides have come down in both Andhra Pradesh and Telangana. According to data from the National Crime Records Bureau, the average number of suicides by people engaged in the farming sector in Andhra Pradesh between 2010 and 2012 was 2,434, compared with 1,800 between 2016 and 2017.

However, to ensure, history doesn’t repeat itself, there is a need for stringent laws for private money lending too, along with a strong private institutional credit network as in other states.

Ironically, nearly a decade after the MFIs crisis, people like Lakshmi remain vulnerable to financial exploitation, while MFIs grow by leaps and bounds in other states.

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