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27
October 2016
 |
| Microfinance (The Total Investment & Insurance Solutions) |
Religare, a
brokerage firm which has consistently been negative on the micro-finance
institutions (MFIs), even as they have reported excellent profits, accompanied
by rising stock prices, has sounded another warning. It points to the troubled
micro-finance debt situation in Wardha. Loksatta,
a Marathi newspaper, has highlighted that borrowers in these districts have
been facing high debt levels. There are reports of defaults faced by many MFIs
relating to amounts as low as Rs500 on a Rs20,000 loan. Many loans provided by
MFIs have been diverted for personal purposes. Loans given to women have taken
away by male members and wasted in alcohol. In addition, there is a huge
interest burden, as interest rates as high as 30% per annum are being charged
on these loans. Village heads have alleged that many MFIs are providing loans
to village women without adequate background checks. Hence, they have requested
the government to take action against these borrowers. The Total Investment & Insurance Solutions
The
situation is serious, as these loans are unsecured in nature. Secondly, it is
easy for a particular borrower to become a member of another Joint Lending
Group (JLG). In effect, the borrower has the ability to take multiple loans to
repay the current dues with a MFI. The Non-performing Assets (NPAs) are
transferred from one MFI to another due to which the vicious cycle of loans
continues.
What happens
when a particular borrower defaults? MFI's have been hiring recovery agents to
recover these loans. In order to avoid repaying these loans, female borrowers
and their families run away from their homes and go into hiding. Sometimes,
certain recovery agents forcefully try to recover these loans and some
borrowers end up selling their utensils and other household wares to meet their
debt obligations. The Total Investment
& Insurance Solutions
Is this
situation limited to Wardha, or does the malaise extend to other areas and
affect the entire micro-finance sector? Brokerage firm Religare is of the
opinion that this represents a widespread problem for MFIs in general. It will
lead to rising Non Performing Assets (NPAs) for the sector and will lead to a
rise in credit costs. With respect to credit costs, Religare concludes, “The
average credit cost in the low-ticket fragmented unsecured lending business
over a cycle (typically 5-7 years) would be 2.5%-3%. In addition, credit costs
are skewed to near-zero levels in an upcycle but surge to around 10% in a
downturn.”
There has
been a buzz around micro-finance institutions in the past two years, with their
stocks currently on an upward trend. They have been able to tap unmet demand
from the unbanked segments of the population. The malaise in public sector
banks (PSBs) has affected their ability to tap this market, while private sector
banks are not interested in small ticket size loans. MFIs are spread across the
length and breadth of the country with a number of branches. A problem in a
small area may not be reflective of the situation prevailing in the sector as a
whole. The Total Investment &
Insurance Solutions
Religare is
one of the few brokerage firms, which has been negative on the microfinance
sector for a long time. In January this year, it came out with a report which
said that asset quality and credit growth among MFIs and NBFCs may be affected
in the medium term due to Reserve Bank of India's (RBI) direction to share a
database of self-help group members with credit information bureaus from July
2016. Earlier, in August 2015 too, it came out with a report stating that there
could be a crisis brewing in India based on the past nine microfinance
failures. It raised concerns on the stupendous growth of 50% rise in
Assets under Management (AUM) in FY13-15. However, the financial performance of
the MFIs has so far defied the gloom and doom scenario painted by Religare.The Total Investment & Insurance
Solutions
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