JOIN USAs 2010 winds down, the story of SKS Microfinance’s bombastic market debut is getting overshadowed by unanswered questions on corporate governance, as well as regulation of MFIs.
Microfinance — the business of doling out small loans at high interest rates to poor people unable to access conventional lending mechanisms — has come under intense regulatory scrutiny in the wake of an ordinance passed by the Andhra Pradesh government that seeks to tighten the screws on the industry, which has been blamed for a spate of suicides in the state. Pushing the industry into the public limelight, Vikram Akula-founded SKS Microfinance mopped up over Rs 1,650 crore (around US$350 million) through its initial share sale in July. The public issue, which attracted huge participation from retail investors, also stoked expectations of more industry players tapping the capital market. The industry witnessed some low moments following the ouster of SKS Microfinance CEO Suresh Gurmani, who was at the helm of the microfinance lender at the time of its dazzling IPO.
His removal sparked off fresh concerns about corporate governance of MFIs, putting the entities in the public spotlight, with criticism of inscrutable business models and high interest rates of over 30 per cent reaching a peak.
Things got worse when a spate of suicides in Andhra Pradesh were blamed on the high interest rates charged by MFIs. Allegations that the use of strong-arm tactics by lenders caused the suicides also dented the MFIs’ image. Andhra Pradesh accounts for nearly half of the microfinance business in the country, with major players like SKS Microfinance, Spandana Sphoorty Financial, Basix and Share Microfin present in the state.
Against this backdrop, the state government had promulgated an ordinance in October that sought to control the interest rates charged by MFIs, as well as check their alleged use of coercive recovery tactics.
Cascading effect
Call it a cascading effect, microfinance entities are now finding it hard to get funds from banks, which is usually raised at an interest rate of 12-13 per cent. Major banks like State Bank of India, ICICI Bank and Axis Bank are estimated to have lent over Rs 15,000 crore to MFIs. ICICI Bank’s exposure to microfinance players is about Rs 2,000 crore, while SBI and Sidbi have lent around Rs 1,000 crore and Rs 4,000 crore, respectively.
Sub-prime crisis
Former Reserve Bank Governor Y V Reddy, credited for keeping India mostly isolated from the global meltdown, has even termed the microfinance turmoil a “sub-prime crisis”
In October, RBI had set up a sub-committee, headed by Y H Malegam, to look into MFI activities, including their interest rate structures. The committee is expected to submit its report by January-end.
Experts said MFIs should restrict their lending to productive purposes and not consumption-related expenses, as currently, the credit extended by the MFIs is even used to buy consumer durables.
They also said the MFIs should stop extending multiple loans to borrowers, as this could lead to defaults. Furthermore, they suggested that the MFIs overhaul their “flawed” business model to ensure sustainability. Prime Minister’s Economic Advisory Council Chairman C Rangarajan has also vouched for capping the interest charged by MFIs.
Most microcredit firms lend money through Self-Help Groups (SHG) or women’s groups. The interest rates charged by these MFIs are as high as 36 per cent, mostly due to the cost of administering millions of such loans in remote areas. As most of the MFIs are now changing their business model and turning into for-profit entities, experts have also called for a separate set of regulations for them, as they are no better than money lenders.
With 2010 turning out to be a mixed bag for microfinance sector, players are likely to keep fingers crossed in the New Year as they await a new set of regulations.