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Assam minister promises loan waiver; lenders brace for hit on credit culture

Loan waivers have impacted the credit culture of borrowers in the past leading to high NPAs.

March 30, 2021 / 12:28 PM IST

An Assam state minister has promised to waive off loans given by Bandhan Bank and microfinance lenders in the state saying the government will return the money to lenders.

“Bandhan Bank & Micro Finance loans to people will be returned by Govt (Sic),” said Himanta Biswa Sarma, a minister in the Assam government in a Tweet on March 29.

Bandhan Bank, which has around 55-60 percent share in Assam’s microfinance market, didn’t offer any comments o this statement immediately. But the head of a microfinance industry body cautioned that a loan waiver can seriously impact the credit discipline in the state.

“If implemented, it will be a huge burden for those MFIs and banks that want to continue in the business in the state as loan waivers completely spoil the credit culture of borrowers,” said P Satish, Executive Director of Sa-Dhan, an MFI Industry body.  Sa-Dhan has 225 members of which 160 are MFIs.

In all likelihood, MFIs and banks like Bandhan may have to scale down their microfinance operations if the loan waiver is implemented, Satish said, adding for MFIs, Assam constitutes five percent of their total business. “Any loan waiver is bad for the financial sector and credit culture,” Satish said.


Assam is a major market for microfinance institutions (MFIs) in the North East. Other companies which have exposure in Assam include Arohan Financial Services, Ujjivan Financial Services and Satin Creditcare. Bandhan is the largest lender in Assam’s microfinance market going by the market share.

Earlier, in its poll manifesto, the Bharatiya Janata Party (BJP) had said if it comes to power in the state, it will help poor women repay their microfinance loans besides bringing in stringent law to prevent public humiliation of MFI borrowers during loan recovery.

But now, the minister has promised the waiver will be applicable to all borrowers.

Poll plank

Both Congress and BJP politicians have made poll promises on loan waiver. Past experience has shown that the moment politicians promise waiver, even honest borrowers stop repayments to their lenders resulting in a total collapse of credit culture in that geography. This logically causes a jump in their NPAs.

During the 2010 Andhra Pradesh crisis too, banks and MFIs had seen a big spike in their bad loan levels after politicians gave a call to borrowers not to pay back to their lenders. The AP Microfinance Bill which had imposed similar restrictions on operations of MFIs, especially with respect to the collection of dues, had unleashed a crisis in the sector. This subsequently forced a significant number of MFIs to shut down or move out of the state.

Besides the loan waiver promises, a recent law enacted by the Assam government also threatens the MFI industry in the state. The Assam Microfinance Institutions (Regulation of Moneylending) Bill, 2020, has put MFIs operating in the state in a tough spot. The provisions in the law include mandatory registration of MFIs within 30 days, collection of dues only at gram panchayat offices or at designated public places, among others.

The two big problematic clauses in the Assam Bill are the rules that say MFIs can collect dues only at Gram panchayat offices or designated public places. Secondly, the requirement to get the registration done within 30 days could also create problems for many MFIs as the process can take a longer timeframe.

If the state government implements the law strictly, it can lead to a crisis situation in the state’s microfinance sector much like the AP law. This can impact not just MFI but also banks that operate in the microcredit segment. “The law is not notified yet on government sites hence there is no impact seen so far. But, once it is implemented fully, it can have ramifications on MFI operations,” Satish said.

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Dinesh Unnikrishnan
first published: Mar 30, 2021 12:28 pm
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