Lower growth, shakeout await microfinance firms
D. Maniamma, for one, has had enough of microlenders.
After borrowing more than Rs.50,000 (USD 1,115) over the years to fund her business selling clothes in this dusty village beyond the sprawl of Hyderabad, she says her family was forced by collection agents to sell its motorbike to repay a loan.
"They have asked borrowers to send their kids out (to work) to get money. They sit down at our homes until midnight," said Maniamma.
Maniamma now leads a group of women who are among the thousands in the southern Indian state of Andhra Pradesh that have stopped repaying their loans since a state crackdown on the sector.
Until late last year, Indian microlenders were a key source of credit for poor borrowers and a growth industry that attracted global investors such as Sequoia Capital and George Soros.
A regulatory backlash against aggressive lending and collection practices has since crippled India's microfinance sector, the world's largest by number of borrowers, with funding choked off as uncertainty persists.
However, given the lack of alternatives in a country where hundreds of millions of people remain outside the banking sector, India's for-profit microfinance industry will survive, albeit with tighter regulations, fewer players, slower growth and narrower margins.
"If they are unable to lend, we'll have to go to money lenders who charge us high rates of interest," said Manjula Nageshwar Rao, who used a microloan to set up her vegetable stall in a crowded suburban neighbourhood of Hyderabad, the industry hub.
The survivors will need to rebuild the trust of borrowers, banks and investors, as well as officials in Andhra Pradesh, where about a third of the country's more than USD 4 billion in outstanding microloans were made - usually about USD 150 at a time, and mostly to women.
The Andhra Pradesh crackdown, which began in October, had a knock-on effect on microlenders across the country as investors and banks held back funding for fear of similar measures by other states. Microlenders with heavy exposure to the state saw collection rates drop to as low as 10% and stopped making new loans.
"We got caught up in the sector's race for fast growth and lent money to people outside our target audience," said P. Thomas, who manages rural operations for Hyderabad-based microlender BASIX in the northern and western parts of the country, referring to the entire industry.
Microfinance in its modern form was brought to prominence by Muhammad Yunus, who won the Nobel Peace Prize in 2006 for helping poor women in rural Bangladesh earn livelihoods by making credit available on a non-profit basis to groups of borrowers running tiny businesses.
More recently, for-profit microfinance grew quickly in countries including Mexico, Bolivia, Indonesia and India - attracting investors but also inviting criticism from those, including Yunus, who argue that microfinance should be socially motivated, not profit-driven.
India had the world's largest microfinance market by number of borrowers, at 25.6 million, as of 2009, and ranked fourth in terms of loan portfolio, at USD 4.3 billion, behind China, Indonesia and Peru, according to the most recent data from the Microfinance Information Exchange, which tracks the industry.
Supporters of commercial microfinance argue that a profit-based model is the best way to attract funding and scale up operations to reach more borrowers who are outside the formal financial sector and rely otherwise on unregulated moneylenders .
"I believe that there will be a future for for-profit microfinance since, one, demand exists, and second, no other approach has been able to scale to sufficiently meet demand," said Narayan Ramachandran, a senior adviser at Morgan Stanley India and director at Bangalore-based urban microlender Janalakshmi Financial Services.
Between 2008 and 2011, loan disbursals at SKS Microfinance, India's largest and only listed operator, jumped from Rs. 1680 crore to Rs. 7830 crore.
That sort of growth enabled the firm to raise USD 358 million last year in a heavily oversubscribed IPO, attracting investors including Soros and the fund management arms of Goldman Sachs and Morgan Stanley.
SKS became the second listed player after Mexico's Banco Compartamos. Before the industry's crisis, a handful of other Indian operators had hoped to follow SKS's lead and go public.
Interest rates across the sector ranged from as low as 10% for non-profit lenders to between 20% and nearly 60% for for-profit players.
Rates have since been effectively capped by the Reserve Bank of India (RBI) at 26%. Unregulated moneylenders are known to charge more than 100%.
Part of what got Indian microcredit firms into trouble was borrowers who took out multiple loans from different firms. Lending also went beyond the core market of small entrepreneurs, with a chunk of funds used for consumption, like buying TV sets or paying for birthday parties and weddings.
"Give for productive purposes - give for a tractor, give for poultry, dairy or for crop loans, so that the farmer or the person in the rural area is able to generate a higher surplus and he or she can pay back the bank loan," said Pratip Chaudhuri, the new chairman of State Bank of India, the country's biggest bank.
Andhra Pradesh came down hard on microfinance institutions in October following complaints of aggressive lending and recovery practices, as well as reports of borrower suicides.
Many local politicians took up the cause against the fast-growing sector, which was competing with self-help groups formed under various state programmes.
Some politicians urged borrowers not to repay.
A representative of microlender BASIX in the lower-income enclave of Krishna Nagar in Hyderabad said he had been the target of threats against collecting payments. Others in the industry in Andhra Pradesh reported similar experiences.
Some borrowers in Ibrahimpatnam said they would resume repayments only if they saw a TV announcement from the same officials who asked them to stop paying back their loans.
In the Khairatabad suburb of Hyderabad, just 25 of 87 loans were being repaid, according to Gundelly Yadgiri, another official with BASIX.
"The rest are saying: 'don't come here again because the government has already paid you. We're waiting for court orders'."
The state ordinance, which is now law, requires microlenders to get approval from the state for every new loan and prohibits them from approaching borrowers at their homes.
In the months after it took effect, new lending all but came to a halt in the state as collections dried up.
Worried lenders and investors pulled back funding for the sector across India. Most for-profit operators had funded their business with loans from banks, which were able to meet part of their priority sector lending requirements by lending to the industry.
Under a rule that took effect in May, the Reserve Bank of India (RBI) will only grant priority-sector credit for microlenders that cap rates at 26% - a rate that some operators say they cannot profitably offer.
Shares in SKS, which reported a loss in its most recent quarter on provisions and write-offs of Rs. 100 crores, have dropped 75% from their late September peak.
Funding has slowly been returning, mainly to larger, more profitable companies with portfolios diversified beyond Andhra Pradesh, although a deputy governor at the RBI said on Thursday banks are still not lending to microfinance firms.
"On the ground level, still banks have not started lending, I am very frankly admitting," the RBI's K.C. Chakrabarty said on the sidelines of an event in Mumbai.
"Banks have promised that they will give. But bankers promise, you know."
Microlenders have their work cut out for them to convince lenders to resume financing their operations.
"They will have to look for their own survival. We don't owe them anything. It is for them to look for innovative ways and look for ways for a good business model," said State Bank of India's Chaudhuri.
To that end, some microlenders are tapping the securitisation market.
SKS raised Rs. 600 crores in May through securitisations, including Rs. 50 crores by selling loan receivables to Yes Bank, a Mumbai-based private-sector lender.
Bangalore-based Ujjivan Financial Services recently raised Rs. 17.3 crores by securitising about 21,000 loans.
BASIX, which made a big chunk of its loans in Andhra Pradesh and is also one of India's largest players, said it has continued to receive funding from lenders including Central Bank of India and has enough on hand to operate its business for the remainder of the year.
Smaller players have fewer options.
"If the current funding situation continues for another three to four months, my survival will be a question mark," said Kishore Kumar Puli, managing director of Trident Microfinance, a small operator based in Hyderabad that once counted State Bank of India among its creditors.
He is hopeful a debt restructuring in June will provide a lifeline and allow his company to make new loans outside Andhra Pradesh.
Despite rules introduced last month by the RBI, uncertainty still pervades the sector. Industry officials hope that with better regulation the sector will become more organised and focused on customer protection, even as growth and profitability moderate.
Credit Suisse recently cut its outlook on SKS to underperform, saying the RBI initiatives did not provide enough clarity to dispel regional disruptions such as the one in Andhra Pradesh.
Some of the RBI rules, such as one that would require microfinance institutions to prove the income level of households in a country where most people work outside the organised sector, are impractical, say industry officials.
The industry is now looking to a microfinance bill being drafted by the central government to bring stability, probably by delegating regulatory authority to the RBI. A draft is expected to be released soon, although it may not become law until late this year.
Fitch Ratings said last month caps on interest rates and margins as well as tighter loan-loss provisions would have the biggest impact on smaller players, forcing for-profit operators to increase their scale or exit the business.
"The crisis is still bad despite the RBI regulations," said Kartikay Rai, head of the network enterprise programme at Intellecash, a Delhi-based company that advises and incubates small microlenders by providing training and helping to raise funds.
"Funding is still a while away. We are just keeping the message intact that we're still in the business," he said.