The Assam Microfinance Bill has begun to show its impact on the books of not just microlenders, but also that of commercial banks. The impact on the credit culture on the ground has reflected in one of the major markets of microfinance in the north-eastern parts of the country.
Bandhan Bank is among the banks which have felt the heat. In the third quarter, Bandhan’s proforma gross non-performing assets (NPAs) grew to 7.12 percent, a good chunk of which has come from delayed microloan payments. While the bank has guided that it will recover from the impact in a period of 2-3 months, some experts aren’t too sure of an immediate recovery. Much will depend on how the local law will be implemented.
The state government recently promulgated a law called - The Assam Microfinance Institutions (Regulation of Moneylending) Bill, 2020 - following a series of reports of coercive lending.
The law mandates MFIs to register within a period of 30 days and collect dues only at gram panchayat offices or public places. These rules have affected the microlenders who say compliance to these norms is difficult.
The problem is not just about the Assam Microfinance Bill. The calls from local politicians to borrowers not to pay back loans too have added to the problem, spoiling the credit culture in the state’s microlending industry. Though the law is primarily targeting MFIs, it will have impact both on banks and MFIs on account of the deterioration in credit culture on the grounds, experts said.
A major market of small loans
Assam is critical for microfinance business. According to rating agency Crisil, Assam’s microfinance portfolio (including banks and non-banks) was estimated at Rs 12,400 crore as on September 2020, or about 5 per cent of such loans in the country.
“The legislation is the latest in a string of events affecting microfinance lenders in Assam: economic stress in the tea plantation industry in October 2019, agitation over the Citizenship Amendment Bill that December, and the COVID-19 pandemic that hit the entire nation,” Crisil said in a note on January 22.
The MFI Bill has the potential to increase asset-quality challenges for microfinanciers, Crisil said. “Additionally, any loan waivers announced would make matters worse due to their potential impact on repayment discipline,” Crisil said, adding “certain provisions in the Bill that pose operational hurdles could trigger collection challenges and end up dissuading lenders from seeking incremental business in the state.”
Banks’ exposure bigger than MFIs
According to P Satish, Executive Director of Sa-Dhan, an industry lobby of microlenders, banks have a bigger share of the market in Assam than MFIs themselves. “Of the Rs 12,000 crore outstanding, just about Rs 2,000 crore is with pure MFIs. Banks like Bandhan Bank, HDFC Bank and small finance banks together have around Rs 7,000 crore loan exposure at the end of September. Bandhan has the biggest share,” Satish said.
According to a note by analysts at Emkay Global, as per Bandhan Bank management, collection efficiency in Assam was 89 percent in January, 2021, mainly hit by waiver pronouncements by political parties in the run-up to elections.
“Based on current assessment, the bank expects a potential 10 percent loss in the portfolio,” Emkay said.
Bandhan Bank management, in a con-call post the result announcement, said share of Assam in MFI portfolio is around 14 percent. “This is first time in last 15 years that Assam has seen some disruption. For Assam, given the situation it will continue to be very cautious on disbursements,” the bank said.
The performance of loan portfolio in the state will depend on how the Assam state government plans to implement the law. Industry associations are engaged in dialogues with the state government on the difficulties caused by the law to microlenders and institutions engaged in pure microlending.
“There is a temporary setback to credit culture in Assam,” said Alok Misra, CEO of Microfinance Institutions Network, another industry body. “We are in dialogues with the state government,” Misra said.
The Assam Microfinance Institutions (Regulation of Moneylending) Bill, 2020, was enacted to “protect and relieve the economically vulnerable groups and individuals from the undue hardship of usurious interest rates and coercive means of recovery by Micro Finance Institutions or Money Lending Agencies or Organizations…,” the state government said.
The law intends to create an effective mechanism to regulate the MFIs including the NBFC-MFIs that are regulated by the Reserve Bank of India (RBI).
How will the Law harm the sector?
According to industry officials, stipulation to collect dues at gram panchayat offices or other places approved by local authorities will prove detrimental to the industry because of likely political intervention and involvement from local officials. “Why would a borrower go to panchayat office to pay up his dues? This is exactly what happened in AP too,” said one of the officials who didn’t want to be named.
Also, registration within 30 days could pose challenges to many existing MFIs, Puli said. Assam is a key state for microfinance industry in the eastern part of the country although the concentration of MFIs is less compared to southern states like AP and Karnataka.The Assam Bill also puts a cap of Rs 30,000 to 50,000 for tea plantation workers and Rs 1,25,000 for other borrowers. According to Macquarie, the Bill will have a medium to potentially long-term impact on the growth of Bandhan Bank in the state since its business is concentrated in the region.