November 4, 2010 8:10 pm

India’s microlenders cap rates

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India’s embattled microfinance industry has agreed to cap interest rates on its loans in southern Andhra Pradesh state at 24 per cent, as it seeks to counter an intense political backlash against the sector.

Industry executives said on Thursday they were still confronting intense grassroots interference in efforts to collect on outstanding debts in Andhra Pradesh, and warned of a “systemic risk” to India’s banking system if normal operations did not resume shortly.

“If we are not allowed to collect repayments, the question is: ‘How do we repay the banks?’,” asked Vijay Mahajan, president of the Microfinance Institutions Network, which represents 44 for-profit microlending companies. “This matter is not being understood in the manner it needs to be understood.”

“Our fundamental right to conduct legitimate business, which is approved by the Reserve Bank of India . . . has suddenly been thwarted to the point where it can suddenly become a systemic risk to the banking system,” he said.

Banks in India – including state-owned, foreign and private players – have around $6bn in exposure to microfinance companies, which borrow the money at rates between 11 and 15 per cent and loan it onwards, in tiny sums, to poor villagers and urban slum dwellers at rates as high as 30 per cent.

Previously, the industry insisted its high interest rates were needed to cover the cost of outreach to so many small borrowers. However, it has decided to cap the rates in a bid to reduce antagonism from Indian policymakers, who are increasingly uncomfortable with the large profits and personal fortunes being amassed in an industry ostensibly dedicated to alleviating poverty.

The industry body also said it had agreed the sectors’ profits – which Andhra Pradesh authorities have described as “hyperprofits” – “would be kept at levels which can attract more capital to maintaining capital adequacy as the MFIs grow to serve underserved regions”.

Alok Prasad, the chief executive of MFIN, said the industry was hoping these steps would be reciprocated by an improvement in conditions in Andhra Pradesh, India’s biggest microfinance market with around 30 per cent of all loans.

“This is our effort to tell everybody . . . we are doing all we can to address every conceivable concern of everybody,” he said. “We do expect the government to respond in equal measure.”

India’s microfinance companies, which have been growing at a blistering pace, have a combined outstanding portfolio of around $6.7bn with around 30m borrowers, and have attracted around $500m in private equity in the last two years. The largest microlender, SKS Microfinance, raised $350m in an August initial public offering, while other top players were expected to follow later this year.

However, the sector was thrown into crisis last month, after Andhra Pradesh authorities – citing a wave of suicides blamed on harassment by microfinance debt collectors – ordered an abrupt halt to debt collections, and prescribed dramatic changes in operating practices.

The industry, which is challenging the new rules in court, won permission to resume collections. But industry executives say field officers are still being obstructed by police officers, local officials, and politicians.

More than 100 field officers from various companies have also been detained overnight, which has created a “fear psychosis” among employees.

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