In light of a recent judgment by the Telangana High Court, the microfinance sector is hopeful for a positive turnaround in both states in the foreseeable future but is growing slow in expanding presence in the states of Andhra Pradesh and Telangana.
On February 14, 2023, Telangana High Court came to the verdict that NBFCs operating in the state of Andhra Pradesh registered with RBI will not be governed by local state enactments. The industry saw this verdict positively as MFIs were facing the problems of dual regulations. This ruling was also welcomed by the leading MFI players as it had again opened up opportunities for them to enhance their presence in the states of AP and Telangana.
In spite of the favourable judgement from the High Court, as per CareEdge Ratings’ interaction with some of the leading MFIs, they have been slow of the block in terms of enhancing their presence in these two states and are yet to meaningfully increase their number of branches or go for any aggressive expansion. The companies intend to move slowly, focusing on building human capital, implementing processes, and understanding the local culture, given that these states have missed the deep penetration of the microfinance activities which some of the other states have seen over the last decade. The microfinance industry, which once thrived in the former state of Andhra Pradesh (AP), experienced a significant setback following the enactment of the 2010 ordinance by the AP government, imposing stringent regulations on the operations of microfinance organisations within the state. Formerly, Andhra Pradesh had been a pioneering force in the microfinance sector, commanding a substantial 65% share of pan-India MFI gross loans as of March 31, 2011. However, the MFI industry witnessed a substantial decline in its fortunes, with AP and Telangana contributing a mere 0.8% and 0.5%, respectively, to the overall Microfinance loan portfolio as of March 31, 2023.The combined market share of AP and Telangana in the overall microfinance landscape is expected to remain below 2.5% over the next one to one and a half years.
This situation underscores a significant risk, namely susceptibility to regulatory oversight and political instability, which poses a potential threat to the growth prospects of the microfinance sector, CareEdge Ratings said.
What was the Andhra Pradesh crisis?
The microfinance crisis that unfolded in the state of Andhra Pradesh in October 2010 represents one of the most significant challenges ever faced by the microfinance industry. This crisis emerged in the wake of disturbing incidents, such as microfinance institutions (MFIs) employing unethical methods for loan recovery, which tragically resulted in borrower suicides. It also involved allegations of borrowers taking multiple loans and MFIs imposing exorbitant interest rates. As a response to these concerns, the Andhra Pradesh government found it necessary to enact an ordinance in October 2010 to safeguard the interests of borrowers.
The key provisions of the ordinance included: Mandatory registration of all MFIs with the district authorities, prohibition of an individual being a member of more than one Self-Help Group (SHG), requirement for all MFIs to publicly disclose the interest rates applied to their loans, imposition of penalties on MFIs employing coercive tactics for loan recovery and the establishment of penalties, such as imprisonment for up to 6 months or fines of up to Rs 10,000, or both, for anyone found in violation of the ordinance.
However, it’s important to note that this ordinance did not materialize suddenly. The roots of the microfinance crisis in Andhra Pradesh can be traced back to 2006 when district authorities closed approximately 50 branches operated by two major MFIs, SHARE and Spandana, in the Krishna district. This action was prompted by complaints from borrowers of these MFIs regarding alleged “usurious interest rates” and forceful loan recovery practices. Tragically, it was even alleged that 10 borrowers in the Krishna district took their own lives because they were unable to repay their loans.
Impact of the crisis on the current situation
Following the introduction of the ordinance, its market share experienced a significant decline, dropping to 38% as of March 31, 2012. This decline continued, with Andhra Pradesh and Telangana contributing to a mere 0.3% market share as of March 31, 2018. The AP crisis ultimately resulted in a substantial loss of Rs 7,000 crore for MFIs based in Andhra Pradesh.
The MFI Industry is still to completely come out of the adverse impact. Growth in the states of Andhra Pradesh and Telangana remains tepid as against very strong growth for the rest of the country. AP and Telangana’s share remained marginal at around 1.3%, as on March 31, 2023, and is expected to remain below 2.5%, by March 31, 2025.
