ap government views on microfinance-malegamcommittee

8/8/2019 AP Government Views on Microfinance-MalegamCommittee

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Government of APs submission before theRBI Sub Committee of the Central Board of Directors to study Issues and

Concerns in MFI Sector

1

CHAPTER I:

Financial Inclusion - Initiatives of Government of A.P

Government of AP has made serious and sustained efforts for reduction of

poverty by following a strategy of organising the rural poor women into self help

groups (SHGs). Monthly savings, internal lending and weekly meetings are the

main entry point activities for these SHGs. Over a period of time, the corpus ofthese groups increased & the internal dynamics of the groups strengthened,

making them viable vehicles for financial inclusion. Banks, which have been

enthusiastic partners in this developing story, have started financing these SHGs

for their credit needs. The SHG-Bank linkage has therefore became a big success

in the State of AP, where the poor directly got linked to the banks and came

under the financial inclusion. Today, more than 1 Crore rural / urban poor

households are brought under this model of financial inclusion, practically

saturating all the poor households in the State of AP.

2. Today, SHGs are living entities, extended families.. and poor women found

a new voice to air their grievances. In many cases, the SHGs have ended

domestic violence on women and provided leadership to the local communities. A

massive social capital has been created in the shape of leaders of these groups.

These SHGs have not sprung into life magically or on paper. All that required

sustainable effort over a period of 15 years. We would like to state how this

massive effort for financial inclusion has started 15 years ago, and continued

thereon.

3. It all started way back in the year 1995 when the State government

implemented the UNDP assisted South Asia Poverty Alleviation Programme


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(SAPAP) programme in selected 20 mandals of three districts viz. Kurnool,

Ananthapur and Mahabubnagar. Under this project, women groups were formed

into SHGs. By 1998, many of these SHGs matured and the banks started funding

their credit needs. In these villages, the SHGs got rid of the money lenders and

got linked to the banks for their credit needs. The SAPAP project demonstrated

the effectiveness ofa new approach for elimination of poverty that does not

depend on government subsidy, but on the strength of the organised

poor. The effectiveness of organising rural poor for financial inclusion and

elimination of poverty are well documented. A new model for financial inclusion

has emerged and this small pilot project was ready to be upscaled.

4. In order to scale up the project, the World Bank funded the AP District

Poverty Initiatives Project (AP DPIP) starting from 2000 in 6 districts. Buoyed by

the tremendous impact on women empowerment, through the social capital

generated, the World Bank decided to saturate the whole state under the AP Rural

Poverty Reduction Project (APRPRP). Under this, the SHG model has been

presented to the poor across the State as a viable model to get out of poverty.

The simplicity and the robustness of the model has attracted attention of the

poor. The big success achieved by these small groups caught the imagination of

the poor and it assumed gigantic proportions spreading to all villages. In the next

10 years, more than 1 million groups are formed involving nearly 10

million households covering virtually every poor household in the State.

Society for elimination of Rural Poverty (SERP) was formed as a sensitive support

organization for hand-holding the groups in their march out of poverty. Thegroups have been federated at the village, mandal and district levels creating the

biggest cooperative of the poor anywhere in the country. Andhra Pradesh became

a torch bearer to the rest of the country in promoting self help movement and

bank linkage. The A.P. Government helped the process by coordinating with

NABARD and the banks for catalyzing credit flow to SHGs.


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SHG A new paradigm for development and entry point for addressing

multi-dimensions of poverty

5. That poverty is multi-dimensional and has many facets extending from

economic to social and demographic, is possibly stating the obvious.

Poverty is not merely lack of access to credit, nor absence of access to

education or health care, nor the inability to dream b ig.. it is in fact, all of

it. SHGs model with its foray into all these aspects, has proved that the

organised poor can attack poverty more efficiently than what an NGO or

Government can do. SHGs are therefore central to the State's strategy for

holistic poverty eradication. The process of institution building has it that at

village level all the poor women are formed into SHGs, all the SHGs are,

particularly in the States where SHGs have reached certain maturity levels,

getting federated at village, mandal/cluster and at higher level as well for taking

up both credit and non-credit services like financial intermediation, social

intermediation and community development through sustainable livelihoods

promotion. Under the project, Community Investment Fund (CIF) has been made

available to these groups, which has been internally lent to the members and the

profit got retained w ithin the group, strengthening them further. Today, the

combined corpus of these groups built over a period of 10 years through savings

and internal lending exceed Rs. 4,911 Cr and the accumulated Savings of these

groups is Rs. 2745.0 crore as on March, 2010.

6. The SHG-Bank Linkage in the State of Andhra Pradesh has moved from

strength to strength with loan disbursement increasing phenomenally from

Rs.197.70 Crores in 2001-02 to Rs.6501.00 crores in 2009-10. The 4700

branches of Commercial Banks and Regional Rural Banks are participating in the

programme. In terms of network, coverage and outreach, the commercial banks


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account for 47% share in credit flow for SHGs and RRBs in 31%. The trend in

disbursement of bank loans to SHGs for the last six years is presented below and

district wise position is furnished in Annexure I.

Parameters 2003-04 2004-052005-

06

2006-

07

2007-

08 2008-09

2009-10

No of Groups

financed2,31,336 2,61,254 2,88,7113,66,4894,31,5154,85,842

4,13,000

Loan amount (Rs.

Crores)752.90

1017.70

(35%)

2001.40

(96%)

3063.87

(53%)

5882.78

(92%)

6844.95

(16.35%)

6501.00

No. of Branches 3,853 3,853 3,853 4,600 4615 47194719

Per Group

Finance(Rs.)32,549

42,816(

31%)

69,337

(61%)

83,601

(20%)

1,36,329

(63%)

1,40,888

(4%)

1,60,000

7. For the year 2010-11 the credit flow projected was at Rs. 7697.89 crore in

respect of 4,24,447 SHGs. As against the above, the credit flow as on 30.11.2010

was at Rs. 4137.83 crores in respect of 2,65,983 SHGs. In addition, a target of Rs

4078.00 Crores was allocated by SLBC to banks under TFI Plus to propagate

Community Based Sustainable Agriculture for the year 2010- 2011.

8. Based on the AP model, Government of India has formulated the National Rural

Livelihood Mission (NRLM) which aims at organising rural poor across the country.

The state has emerged as a torch bearer of the movement that is going to

transform the rural poor across the country.


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SHG-Bank Linkage Programme How it is different?

9. Bank Linkage for the poor and women has received extensive recognition as a

strategy for poverty reduction and for economic empowerment for two reasons:

a) It is not government-subsidy dependent

b) It is a direct contact of the poor with the Bank, without any

intermediation by third party.

The programme helped inpromoting linkages between banks and SHGs to have

better access to financial services from Banks and this enabled SHGs to borrow

funds from banks at an affordable cost, and banks considered banking with SHGs

as a good business proposition with low transaction cost and low risk, giving

a fillip to banking activities viz. thrift and credit.

10. The SHG model has yielded spectacular results and demonstrated that the

poor are bankable. The programme is different from the earlier poverty

alleviation programmes as it not only focused on credit but also credit+ and

credit ++ services. It also helped in proving that Self Help and mutual help can

be a powerful vehicle to socio-economic upward transition, more efficient and

responsive participative financial services management, minimizing mismatch

between the expectations of the poor and capabilities of the formal banking

system, harnessing collective wisdom and peer pressure of the group as

valuable collateral substitutes, lowering transaction cost and empowerment of

poor women. More importantly, unlike other poverty alleviation programmes, theprogramme enables repeated access to bank finance to meet their various credit

needs.


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Impact of the SHG-Bank linkage programme

11. Inculcation of saving as a habit has been the biggest impact of the

programme, which was otherwise incomprehensible earlier by the rural poor.

There is growing awareness among members for utilization of loans for

productive purposes. The State Governments have realized the relevance of

channelising funds for rural poor under different programmes for their uplift as

SHGs have proved themselves as best platforms for implementing Government

Programmes. The Banks are treating SHG financing as business proposition with

healthy repayment performance and with much lesser transaction cost. The

programme also has contributed significantly in reducing dependency on money

lenders.

12. The studies conducted by NABARD show that SHG women are adopting family

planning measures more effectively and brought all their children under

immunization programme. Remarkable improvement was seen in social

empowermentof women in terms of self confidence, involvement in decision

making, increased expression of their view points and participation for their own

development. The findings of various studies conducted under aegis of Indira

Kranthi Padham (IKP) in the State of Andhra Pradesh revealed the following:-

More than 79 per cent of SHG women had undergone family planningoperations.

More than 60 per cent of the children availed ofanganwadi facilities. Cent per cent of the children had been immunized in the pulse polio

programme.

More than 70 per cent of the women were able to approach banks on theirown for accessing institutional credit.


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There is remarkable improvement in social empowerment of the membersin terms of self confidence, involvement in decision making, processes,

increased expression of their view points and participation for their own

development.

Saving as a habit has been the biggest asset of the programme, which wasotherwise incomprehensible earlier by the rural poor.

Growing awareness among members for utilization of loans for productivepurposes.

Rural families have developed respect for their women. State Government has realized the relevance of channelising funds for

rural poor under different programmes for their uplift as SHGs have proved

themselves as best platforms for implementing Government Programmes.

Bankers too have realized that the SHG financing as business propositionwith good recovery and with much lesser transaction cost.

These study findings clearly show how a programme which is mainly intended for

improving the economic conditions can spill-over effectively in improving other

social parameters of a better quality of life.


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CHAPTER II

Coming of MFI s

13. It is into this setting that the Micro Finance Institutions (MFIs) have entered.

MFI model has been recommended by the RBI as an instrument for financial

inclusion of the poor. RBI has mandated that the MFIs have to give loans on

group collateral; and the group itself has been well-formed having standing of at

least 6 months.

14. The mutation of MFIs has occurred in 3 stages:

a) In the first stage, MFIs started as NGOs forming groups, providing micro-credit and rendering other services to poor. However, they were limited as

small experiments and did not have geographical spread.

b) In order to overcome the limitation of resources and geographical spread,they have formed themselves into Section 25 companies, thereby making

profit and using it further spread their activities. For the first time, profit

has been made out of poor; although it has been used to spread activities

into other areas. The group which has so far saved and grew found that

what they earn as margin will not serve them, but someone else.

c) In the third phase, the companies found that it is necessary to make profit

to grow and garner funds from outside resources; and marketing it as a

good business opportunity among private equity funds. Their argument is

that by showing a business opportunity, we can get more funds for the poor

from outside. The point is that the funds flowing from outside have onlyone concern higher profit, at whatever cost. The poor have become

an object of profit, a business opportunity. Once this transformation

has occurred, none of the ideals that drove this sector remained; and if at

all, have been used as lip-service for outside consumption.


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15. It is this form of predatory organizations, with unrelenting drive for

higher and higher profits that the rural / urban poor have encountered in the

recent years. Credit has been pumped into the poor, by short-cutting the process

of group formation. The modus operandi has been as follows:

a) Increase the credit flow by giving stiff targets to the credit officers posted inthe rural areas. The staff have to either perform or leave.

b) The credit staff would reach out and identify households who just agree totake a loan. Loan-with-no-questions-asked.

a. No verification of the previous credit historyb. No checking of the purpose of the loan whether it can produce

incremental income for servicing the debt

c. No check of the ability to repayc) Once a household is found to take a loan, a make-shift group is formed

with few others who are similarly desirous of taking loan.

d) Loan is dumped on the hapless rural poor after taking the individualpromissory notes. This is violative of the RBI guideline of group

guarantee.

e) Since the group is a make-shift group with nothing common among them,the recovery is done by recovery agents. Mostly they are ruffians who can

threaten the people to submission.

f) Recovery is done on weekly basis on a fixed day, irrespective of the abilityof the group to mobilize money for the repayment. If repayment is not

done on a day, the coercions starts as a threat and can end up driving the

women for prostitution or even suicide. No holds barred, cruel,barbarous recovery process.

g) If there is no money to repay, they encouraged taking fresh loans torepay the earlier loans. A debt spiral got created due to this ever-

greening tactics. MFIs showed 100% recovery to the banks concealing

the fact that much of the recovery has been by taking fresh loans.


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It is this which has led to many suicides in the recent past. The organization

that is supposed to bring them out of poverty, not only takes away the

surplus, but their honour.. and even their life.

16. It is these MFIs which were expected to reach out to those areas which have

had not been serviced by the banking sector to facilitate financial inclusion of poor

as envisaged by GOI/RBI. It may be noticed how and why these MFI have

preferred to focus more in the areas where banking network is active and

on the groups that are already in the financial inclusion , taking advantage

of the awareness of poor in group dynamics and lending methodology.

17. The facility of attracting investment from Private Equity investors in micro

finance sector opened new gates as in the lure of higher profits private equity

investors across the globe started investing in these institutions as the sector was

shown having great potential based on the "the bottom of the pyramid"

concept and is offering very high returns. These PEs are not social investors and

therefore drive MFIs to earn more profits for them defeating the very purpose of

Financial Inclusion. Their emergence was also aided by bank finance to the sector

as the same was classified as priority sector lending.

18. Over a period of time, the other activities of MFIs were left out and focus

remained on giving credit; and making profit out of it. There remained no

difference between these institutions and the traditional money lender;except that they are located outside the village, whereas the latter lived in the

village. In the interest rates, the methods of recovery, the attitude

towards poor there is no differencebetween the MFI and the money

lender anymore. Moneylenders dont go out and market their loans as MFIs do.


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Besides, moneylenders make loans strictly against collateral and this is a built-in

check on lending.

Emergence of problems in Andhra Pradesh

19. It is paradoxical that major MFIs functioning in the country have originated

from Andhra Pradesh and reasons for the same are not far to seek. Even though

the State made tremendous efforts to organize poor into groups and facilitated

bank linkage under SHG-Bank linkage programme supported by RBI, NABARD and

banks, seeing the business potential in the sector, availability of clientele

readily wh ich lowers the cost of group formation and on capacity building

as also profits earned by the MFIs, more number of MFI jumped in and the

number of clientele of MFI has witnessed enormous growth in a short span of time

resulting in multiple lending. This was aided by banks which provided finance

liberally to the sector as it helped them in achieving the priority sector target

alongside a healthy and hassle free loan portfolio.

20. The MFIs are competing for customers in rural areas and without due

diligence are lending, putting lot of pressure on staff. The staff with stiff targets,

have ignored certain basic aspects like debt carrying capacity of poor. The

group processes are ignored unlike in SHG bank linkage and MFIs poached the

members of SHGs into JLGs and therefore the group does not act as a mechanism

to prevent adverse selection of borrowers. All these practices have adversely

affected the functioning of SHGs disturbing group dynamics, savings and evenrepayment of loans to banking sector.

21. Poor are now looked as an opportunity for business by MFIs which

promised high profits. MFIs depended on the platform and have grown bigger,

and instead of relying on group dynamics for recovery, they have employed


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agents, who motivated by incentives, contributed to multiple lending and

unleashed terror for recovery of dues. They charged high interest rates,

resorted to strong arm tactics and coercive means for recovery of loans resulting

in further impoverishment of the rural poor. MFIs yearning for profits

pumped huge amount of funds without due diligence with regard to loan amount

and utilisation thereof resulting in over indebtedness and debt spiral.

22. The problem with MFIs cropped up in A.P in the year 2005 itself and at the

time there was a consensus with MFIs body, as a part of the code of conduct, that

MFIs would reduce their interest rates and stop unethical practices. However,

within in no time the assurance was violated and MFIs continued the same old

practices throwing a new challenge.

Loan portfolio of MFIs- Present Status

23. There are 79 MFIs operating in the State in Rural Area and 63 in Urban

area which are registered with Registering Authority. The details of the loan

portfolio, both in rural and urban areas, are indicated separately in the following

table.

Si noParticulars Rural Urban Total

1 Total Number of borrowers (in

lakhs)

65 31 96

2 Loans given (in crores) 8373 4242 12614

3 Principal repaid (in crores) 3526 1850 5376

4 Interest repaid (in crores) 746 581 1328

5 Total repaid (in crores) 4273 2431 6704

6 Amount outstanding (in crores) 4846 2392 7238


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24. The average per member loan for the MFIs in the state was at Rs 13900/

which is almost equal to the per member loan accessed by members through

SHGs from banking sector. However, many members have accessed loans from

more than one agency and the borrowings are in the range of about 40000-

50000. The total outstanding at Rs 7238 for both rural and urban is less than the

loan outstanding under SHG-Bank linkage programme at Rs 12500 crore as the

repayment period for MFIs is 50-52 weeks where as loan maturity period for loans

under SHG-Bank linkage is about 3 years. The interest rates charged varied from

26-40%. The agency wise position is furnished in Annexure II .

25. Considering that the loans are accessed by about 80 lakh households, the

average debt per household is about Rs. 30,000 to be repaid per annum. This

translates to nearly 75% of their total annual income to be spent on debt

servicing. Clearly, the loans are not serviceable; and the credit that has

been pumped is vastly excessive, and beyond the capacity of the poor.

Issues with MFIs

26. There are four major issues with MFIs with regard to their operational

methodology viz. charging usurious rates of interest including levying of other

charges, recovery of loans in weekly installments, multiple lending to a single

borrower/group, opaqueness in operations and coercive recovery methods

adopted and these are discussed below briefly.

Multiple lending

27. The MFIs are targeting members of SHGs, whose awareness levels have been

assiduously built over years, and splitting them into JLGs affecting the functioning


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of SHGs adversely. As formation of group is time consuming and MFIs started

using the SHG already formed for the purpose. This not only resulted in poor

group dynamics in SHGs but also resulted in multiple borrowing by members.

28. Under JLG concept, loans are given against mutual guarantee of members and

in case of default by a woman, other members are instigated against the

defaulters through various means leading to crimes. Thus, defaulting members

are compelled to borrow from other agency to repay the loan. Thus the debt spiral

continues more so because the loans are not for income generation purposes.

There are many cases where more than three loans were extended to each

woman in SHG.

29. There is competition among MFI to lend more in order to maximize their

profits. In the process it is the due diligence of the borrower, proper appraisal of

loan, cash flows etc., which takes back seat and despite knowing that other MFIs

have lent, they entice women to take more loans. Though, initially MFIs were

catering to the credit needs of poor, multiple lending without due diligence of

clientele has created a debt spiral resulting in borrowing from one agency and

repaying to the other without much tangible benefit to the needy.

30. It is ironical that the extent of debt contracted by poor from different MFIs is

to be serviced within a period of ONE YEAR. It is also difficult to comprehend as

to how poor with a meager income will be in a position to service the loans

ranging from Rs 30000-50,000 paying usurious interests rates in excess of 30%and meet their living expenses all totaling to about Rs 75000-100000. Obviously,

it is difficult to service loan unless they resort to multiple borrowings and borrow

from one agency to pay another. If viewed against the back drop of Planning

Commissions definition of poor @ Rs 20000 per family the enormity of the

problem could be easily understood.


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31. Multiple lending increase transaction cost to the borrowers as against single

larger loan and Portfolio at Risk (PAR) is effectively financed by financial system

and quality of loan portfolio is masked. Securitization of such a portfolio reminds

of sub-prime lending.

High, usurious interest rates

32. In the name of commercialization of microfinance, MFIs have been charging

interest rate as high as 30-50%, resulting in huge burden on the poor. It is a

matter of concern that the flat rate of interest concept in mF sector intended to

facilitate easy calculation of interest amount by illiterate clientele is misused as

effective rate of interest is concealed and poor do not understand the intricacies of

such charges.

33. MFIs also charge processing and other charges, collect interest free

deposit upfront, collect interest free deposits on a monthly basis, collect

interest on loans upfront, and all these increase the cost of the borrowing. It is

to be understood that the MFIs claim operational cost in excess of 10% which

is built into the interest cost but also recover the amounts separately to meet the

same! It is therefore not astonishing to state that the RoA of MFI s is very high

at about 4-5%.

34. It is pertinent to mention that banks while lending to MFI stipulate monthly,quarterly, half yearly repayment schedules and MFI due to lower repayment

cycles are in a position to enjoy float which would help them in improving their

yield on such funds at the cost of the poor.


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Recovery of loans in weekly installments

35. The JLGs are formed by MFIs for lending and repayments are not fixed by

reckoning cash flows. Many a time the loans are utilised for consumption purposes

and there is not mechanism to verify the loan utilization as it casts unnecessary

burden on field staff. It is argued by the sector that members would be in a

position to repay on a weekly basis on the plea that cash flows accrue to poor on

a daily basis due to earnings from wage labour and activities like non-farm sector.

However, it is pertinent to state that there is no thumb rule for the same as even

payments of wages under MG-NREGS do not accrue on a daily basis.

36. Rural poor suffer from uncertain cash flows. None of the farmers employing

the rural poor on their farms pay them weekly. On the other hand, the only

certain thing is the day for recovery of the weekly installments. No allowances

are given if the poor plead that there is no money to repay for that week. In the

face of uncertain cash flows, smaller the periodicity of repayment higher

the risk of non-payment.

37. A major issue requiring attention is extent of debt thrust into the hands of

poor. It was difficult for the poor to carry a debt burden of about Rs. 50000 to be

services in a year along with interest without any cash flows other than wages or

even with agriculture on a small land holding. Poor borrowing from more than one

MFI are required to repay the loan almost on 2-3 days in a week. This together

with debts contracted from other sources like SHG-Bank linkage programme etc.,makes it difficult to service the debts compelling them to borrow from some other

agency to smoothen cash flows resulting in debt spiral, doing more harm than

good resulting in impoverishment.


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38. The weekly repayments exposed the poor to the tremendous pressure and

multiple lending abetted the problem. As the cash flows were not matching for

servicing loans on weekly basis, MFIs resorted to coercive recovery methods

resulting in a spate of suicides in the recent past. Due uncertain weekly cash flows

as also pressure mounted by MFIs for repayment of loans on a weekly basis

resulted in suicides.

Ever greening and securitizing delinquency is the order of the day for MFI

lending

39. MFIs sanction fresh loan of higher amount even while the earlier loan is

outstanding after members repay 35 to 45 loan installments. In such cases

amount released will be net of earlier loan amount which not only ensures

recovery but also fetches higher interest income as the interest is recovered for

entire period of 52 weeks instead of for 35 to 45 weeks as may be the case.

Therefore through these unhealthy practices a repayment of 100% is being shown

and thus the delinquency is covered up deliberately and securitized for

further loans from Banks. These are unethical, anti poor and need to be

curbed.

Coercive recovery and other unhealthy practices

40. Because they do not invest time and energy on building the group,they have to depend on muscle-men for recovery. There is an unhealthy

system of recovery of loans as agents of MFIs are resorting strong arm tactics

including threatening the defaulting members of a group. The coercive recovery

methods include driving them to suicides to claim insurance, abusing and

insulting, manhandling, molesting, making defaulters stand in the sun,


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taking aw ay cooking utensils, TV or such other objects, leading to untold

misery resulting in suicides. This distress has lead to a spate of suicides in

the recent past. There are cases forcing women into prostitution to repay loans.

Heavy borrowings and pressure from MFI are resulting in mental tensions/anguish

to borrowers resulting in family disputes. MFIs were entering houses causing

personal disturbances, frequent visit to houses and place of work, following

borrower from place to place and undertake coercive recovery.

41. The MFIs collect security deposits in addition to other charges like

membership fee, bank charges, documentation charges, card fee,

insurance charges, stationery charges which are not made known to

members further increasing the effective cost of the loans. Insurance policies

covering loan amount were not transparent and the MFIs have not passed

on the claims to the legal heirs.

42.There other practices of obtaining signatures on blank papers, blank cheques,

taking securities like house pattas, title deeds of lands et. It had come to the

notice that various documents have been collected by MFIs as collateral security

for the loan such as Ration card, Arogya Sree Card and Promissory notes.

43. News paper clippings of the various incidents/developments that have

happened preceding to the issue of ordinance are enclosed to the note for

reference.

Issue of Ordinance and Objectives

44. Faced with the extreme distress in the rural areas and increasing suicides,

Government of AP vested with the responsibility of maintaining the Public Order


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had to address the issue. Government of AP have had a series of consultations

with RBI, Ministry of Finance and even major MFIs before issuing the impugned

Ordinance. The Reserve Bank of India advised that as far as regulating the

coercive practices and interest rates, State Government was the most effective

agency. (The letter of Hon'ble CM to Governor RBI dated 5th May 2010 and the

reply by RBI Governor dated July 19th 2010 are at Annexures III & IV ).

Discussions were also held with MFIN, SKS and Spandana, and others, on self-

regulating the sector. The self-regulatory regime, promised by the MFIs, did not

get operationalised and at any rate the self-regulation has not worked.

45. It is respectfully submitted that after taking inputs from all stakeholders,

and considering the enormous distress that the rural/urban poor had been going

through, the State Government had promulgated the AP MFI (Regulation of

Money Lending) Ordinance 2010. In order to operationalise the Ordinance,

Rules were issued on 19th

46. The Statement of Objects of the Ordinance states that the SHGs, which are

formed and brought under the financial inclusion process by linking with the

Banks, are sought to be protected from exploitation

October 2010. As can be seen, the Regulation relies on

more disclosures by MFIs about their lending practices, preventing multiple

lending & banning coercive practices in recovery.

by regulating money

lending transactions by the money lending MFIs, charging usurious


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interest rates and resorting to coercive means of recovery, resulting in

impoverishment and at times leading to suicides of the borrowers.

a) MFIs have to register with Registration Authorities (RA) - PDs DRDA (forrural areas) & PDs MEPMA (for urban areas). For registration, MFIs have to

provide list of

The

objectives of the Ordinance are to regulate the money lending activities of the

MFIs in the interest of the 1 crore SHG members. The main provisions of the

Ordinance and the rules issued thereunder are:

b) In order to prevent giving of multiple loans to one household withoutverifying the capacity to repay, MFIs proposing to give loans to SHGs which

are already linked with the Bank for credit needs, need to apply for prior

approval to the Registering Authority. The Registering Authority has to

check the capacity to repay before giving this approval. Lending to SHGs

already having bank loans without this approval is an offence punishable

with imprisonment of up to 3 years.

villages or towns in which they are operating or

propose to operate, the rate of interest being charged or proposed

to be charged, system of conducting due diligence and system of

effecting recovery. Operation w ithout this registration is an offence

punishable w ith imprisonment of up to 3 years or a fine of up to Rs.

One lakh or both.


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c) Use of coercion for recovery of the loans will be an offence punishable with

d) MFIs have to maintain records which shall be available for scrutiny by theinspecting officers and relevant details shall be shared with the borrowers.

They should also disclose the loans given along with rates of interest every

month to the RA.

imprisonment which may extend to three years or w ith fine which

may extend to Rs. 1 lakh rupees or w ith both.

e) A system for registering complaints from the SHGs on MFI atrocities hasbeen put in place at the level of RA with a provision to enquire and take

action, if found to be correct.

f) The provisions of the Ordinance are also applicable for the subsisting loansgranted by MFIs to the SHG members.

Legislative competence

47. As per the List-II (Sl.No.30) of the Seventh Schedule of the Constitution of

India, Money Lending is the State Subject. The Constitution enables,

mandates, the State Government to regulate the money lending activities and

protect people from exploitation. The present Ordinance regulates only the Money

lending activities of the MFIs and the subject matter including the measures of

regulation of this activity, are not occupied by any central legislation.


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48. It is respectfully submitted that in pith and substance the impugned

ordinance seeks to regulate the activity of money lending, which does not in any

matter deal with the matters stated to be enumerated under entries 43 and 45 of

List I of 7th Schedule of the Constitution. The corporate structure and the other

details of the agency which is involved in the money lending activity are incidental

to the course of regulation of the activity of money lending by the State in its

competence derived from its enabled legislative entry contained in Entry 30, List

II of the Constitution of India. The various provisions in the ordinance are not in

any manner dealt with in any other pre-existing central law, in the manner

provided by the ordinance and there is therefore no conflict of the ordinance with

any existing law legislated by the Union Parliament. The argument by some MFIs

that they are under Chapter III (b) under the RBI Act, 1934 and the regulatory

measures provided therein and on such basis that their activities are regulated

under RBI Act and therefore the field is occupied by central legislation is

untenable. The provisions of the Chapter III (b) of the Act do not in any manner

regulate the activity of money lending by the NBFC and all the provisions referred

to therein are limited to regulating the activity of acceptance of deposits by the

NBFCs; or about the corporate governance and capital adequacy. In such view of

the matter State Government has the competence to promulgate this ordinance.

The qualifying parameters of Article 213 are satisfied, since in the exigency of the

situation resulting from suicides, the regulatory measures had to be put in place

and the legislature was not in session. The circumstances explained above


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required a governmental response and therefore the impugned ordinance is

promulgated.

49. As regards the provisions made under the ordinance with reference to

maintaining of business of account, statistical returns, penalties and punishments,

it is submitted that the prescription of the format and statements prescribed

under the Ordinance is in the context of the regulatory mechanism to be in place

by the State and is not to regulate the organizational structure or otherwise,

which could be an obligation of the NBFCs and other entities under various other

laws. The State regards the Ordinance as an instrument for regulation of the

activity of money lending in public interest so as to ensure that there are no social

consequences impacting the society and to prevent exploitation of the strata of

society which needs financial help regularly.

50. The claim of MFIs that their activities should be treated as banking

activities and therefore cannot be regulated under Entry-30 of List-II and that

their activity is to be governed only under RBI Act 1934 is incorrect. As stated

herein above, the Ordinance does not seek to directly deal with the MFIs as a

corporate entities i.e., NBFC, but only seeks to regulate the activity of money

lending and the MFIs being NBFCs is only an incidental factor to the impugned

law.


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CHAPTER I II : Suggestions for streamlining Microfinance

51. We need to rethink the role of MFIs in the rural economy and financial

inclusion.The time is ripe for regulation of all forms of MFIs. There is however a

strong need for prudential supervision of NBFCs and other bigger MFIs and in case

of the smaller MFIs there could be non-prudential supervision to lower the cost of

supervision. The regulation shall be with reference to institutional sound ness,

financial appraisal and operational efficiency and methods. Certain other

measures are also required to be addressed which have bearing on MFI financing.

In this regard the following suggestions are made under two categories as

mentioned below.

A. Suggestions relating to MFIs

B. Suggestions for augmenting credit flow

A. SUGGESTIONS RELATING TO MFI s

I. Policy Initiatives

Reaching unreached areas

52. MFI have complementary and supplementary role to banks in purveying credit

to the poor and provide last mile connectivity and therefore they have a role in

states like Bihar, Jharkhanad, North-eastern state etc., where CD ratio is low. A.P

accounts for 40% of the SHG-Bank linkage in the country. At the field level banks


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are vary of lending to poor as the penetration of MFIs is so high they fear defaults

considering that whatever surplus is available with poor will be skimmed off by

the MFIs. It is also a fact that MFIs are lending to both JLGs of women as also of

men and the latter as individuals for meeting crop cultivation expenses typical of

money lender increasing debt burden on poor enormously.

Capacity building of groups

53. Efforts made by most of the MFIs in building up the capacities of poor are

negligible as the focus is on only profits. While MFIs would be a better conduit in

unbanked and microfinance deficit areas, it is necessary to make them to provide

credit plus services to them. MFIs should have a dialogue with the

government/RBI/NABARD/Banks and supplement only in microfinance deficit

areas. Explore whether SHG concept group training, savings are mandatory even

in case of JLGs in view of NRLM.

Preventing split of groups

54. SHG members support each other in times of difficulty and the group is a

stress relieving mechanism. Breaking off such groups into JLGs where the

concepts like meetings, savings etc are dispensed with it resulted in absence or

weak group dynamics. Group approach as followed by the government is not only

for mere purveyal of microfinance it has much larger objectives as group

approach has provided an very efficient entry point for various poverty alleviationprogrammes. It also has advantages connected thereto would flow to the

members. Therefore, a member can not be a member of other group as such

multiple membership makes a woman a repeated occurrence in the constituency

of borrowers for the MFIs.


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Credit Bureau

55. Multiple borrowings are rising alarmingly, triggering debt spiral as they borrow

from one MFI to repay another and the practice is resulting in default in

repayment of low cost loans from banks by SHGs. This needs to be addressed by

sharing information about clientele village by village so that multiple financing

does not take place. Rural credit bureau could offer a solution. The SHG

federations at the district level would be in a position to handle the work.

Prior ity sector status to loans

56. Priority sector status to loans extended by banks to MFIs may be given only if

the banks abide by certain conditions like preventing multiple lending, charging

lower interest, rationalization of lending practices, lending to only IGA etc.

II . Investments in MFIs

Discouragement to PEs/ IPOs

57. The facility of attracting investment from Private Equity investors in micro

finance sector opened new gates private equity investors across the globe started

in lure of higher profits are investing in the MFIs as the sector has great potential

and is offering very high returns. These PEs are not social investors and therefore

drive MFIs to earn more profits for them defeating the very purpose of Financial

Inclusion. There is a need to promote social investors as also rope in corporates

evincing interest in CSR.


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58. The MFIs shall not be allowed to go for IPOs as they have to generate more

and more profits defeating the very purpose of microfinance.

Profitability of MFIs

59. RoA of MFIs is in the range of 4-5% which is considered very high and there is

a need to rationalize the same in tune with other similar financial institutions.

II I. Loan Terms

Multiple borrowings

60. Multiple borrowing is a major problem and has a potential bring down the

entire financial sector. There is a need to have proper coordination among MFIs

and the banks in purveying credit to them. Systems like approval by resolution

of SHG members to borrow from MFI need to be taken from SHG/VOs and

members have to voluntarily disclose their borrowing from MFI to SHGs.

Limiting Loan quantum

61. Multiple membership in different groups is to be barred. Further, for poor

family as a unit needs to be assed for the purpose of due diligence and debt

carrying capacity. As the cause of debt trap is multiple loans, the endeavour

should be to ensure that borrowers are not loaded with multiple borrowings evenbefore discharging the earlier loan. Poor can not have access to lenders without

limitation as it results in heavy indebtedness.

Transparency in pricing of products


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62. There is also a need for transparency in pricing of products and MFI should be

transparent with regard to interest rates mentioning effective rate based on

whether it is on reducing or flat basis. There is a need for transparency with

regard to interest rate and other charges. MFIs have resorted to various deviant

practices in the form of charging very high effective rate of interest, collection of

upfront charges, processing charges, collection of interest free security deposit,

lack of transparency in insurance etc. This needs to be ensured. The MFIs shall

communicate openly the effective interest rates charged which is inclusive all

other charges. Moreover, there has to some uniformity/bench marks/best

practices in this regard.

63. There is a need to arrive at what is reasonable rate of interest taking into

operations of various MFIs. Such operational cost can be arrived at based on

bench marks evolved for different MFIs with different levels of MFIs. It is to be

mentioned that operational cost varies for MFIs with different levels of business as

also same level of business. There is a need to bring down the cost of the cost

significantly using the technology, or sharing geographical areas.

Repayment schedule

64. Borrowers were put to great hardship to mobilize, accumulate and service

commitment in view of their uncertain levels of income flows on a weekly basis.

Having regard to uncertain nature of livelihood and employment opportunities for

such BPL families, most of the borrowers were unable to secure money on aweekly basis resulting in misery and hardship on account of their inability to

repay. This becomes all the more difficult when all the multiple loans need to be

serviced on a weekly basis. Though quantum of money payable per month does

not change but the probabilities of poor securing money over a period of one

month to repay the loan are higher. It is for this reason that banks when they


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lend to SHGs, they stipulate monthly repayment cycle. It all depends on cash

flows from an activity undertaken and very fact that some of the MFIs are

extending loans to be recovered on a monthly basis reinforces the fact that loans

can be repaid in monthly installments. This would also effectively brings down the

cost of operational cost to the MFIs and such benefits could be passed on the

poor.

65. MFIs are persisting with small loans sizes and weekly repayment schedules

helping increasing the multiple borrowings. There are studies to state that

monthly repayments have not contributed to defaults as compared to weekly

repayments and this could be one reason that some of the MFIs have exclusive

monthly repayment and a combo of both monthly and weekly. Monthly collection

system would significantly reduce operational cost of MFIs. It is not out place to

state that efforts made by MFI towards reducing transactions using technology are

not note worthy.

66. Larger size of loans can not be serviced with weekly installments and as such

the MFIs persist with small loans. But due to prevalence of multiple lending, due

to aggregation of loans, servicing of loans on a weekly basis gets very difficult due

to cash flow problems, higher interest etc causing enormous strain on poor. The

fact that banks stipulate monthly recovery as also some of the MFIs testifies the

fact that if loan terms are just and fair there is no need for coercive methods of

recovery requiring intervention of the State.

Rescheduling of MFI loans

67. The debt burden on poor women on an average is to the tune of Rs 30,000

per member and members are experiencing severe distress in servicing of loans.

This needs to be addressed by rescheduling repayment of loans extended by


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MFIs. Considering the income levels of family at about Rs 48,000 per family and

assuming the norm that only 40% of the income is to be considered for

repayment the loan taken by members can not be serviced along with interest in

a period of one year. Under the circumstances, the MFIs need to reschedule loans

in such a way the same are repayable over a period of 3 years.

IV. Financing of MFI s by banks

Loan Monitoring

68. The present crisis has emerged because SIDBI & Banks lent money to

MFIs without monitoring their activities. There has been wide spread

violation of the RBI guidelines issued to the Banks in their letter dated

22nd

November 2006. This calls for a detailed investigation and to fix

responsibility on the Banks for these violations. It is understood that some

banks stipulate a condition in their sanction letter to MFI, inter alia, to cap the

interest rate at a particular level. In case of other banks, they must have

stipulated specific terms and conditions as per RBI guidelines. It is pertinent to

mention that banks have extended loans to MFIs do not have proper mechanism

and system to verify loan utilization and adherence to the loan terms and

conditions. As a result, it was evident that the loans extended to the MFIs were

lent to SHGs, which were already financed by their bank branches, by splitting the

same into five member groups/JLGs. Ironically, this has happened in a State

where penetration of micro credit has been very high due to active participation ofbanks under the SHG-Bank linkage programs There is a need to place much

stronger mechanism to monitor the loan portfolio by banks.

Implementation of RBI guidelines


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69. It is pertinent to RBI vide their circular dated 22 Nov 2006 addressed to

banks. The banks were advised to take necessary corrective measures as MFIs

are reaching same set of poor, competing MFI are operating in the same area

resulting in multiple lending, no efforts are made for capacity building of groups,

and that banks have not engaged with MFIs regarding systems, practices and

lending policies for not splitting the groups etc. However, banks have not adhered

to these guidelines. There is a need to discipline banks in this regard.

70. There is a need for change in microfinance policy of RBI to reign in erring MFI.

It is a matter of concern that many nationalized banks are extending finance to

MFI which are operating in the same area even where SHGs have already been

extended finance by their bank branches.

V. Other issues

Coordination with MFI s

71. The SHG-Bank linkage programme has significant bearing on increasing the

incomes of poor. This warrants a regular forum at the State level under the

Chairmanship of RBI with different stakeholders as members to discuss the issues

on progress made in credit flow, issues for discussion on new initiatives,

operational issues etc., and for placing a mechanism to coordinate the role of

MFIs to prevent multiple lending and consequences of such effects on poor.

72. MFIs may be made members of DCC to facilitate review of their out reach,

area of operation etc., and send reports on microfinance to Lead Bank with a copy

to NABARD/DRDA.

Financial literacy


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73. As more and more money is made available by MFIs beyond the debt carrying

capacity of the poor for various reasons, the poor are borrowing indiscriminately

and are struggling to repay. RBI may propagate financial literacy more

aggressively and coordinate with SERP/Govt in the process involving community

based institutional architecture like ZS/MMS/VO to cover larger population of

poor.

MFI s- Staff related issues

74. There is a need to regulate hiring of recovery of agents as this is leading to

coercive practices in recovery as the incentives are dependant on minimizing

default rates. There have to be some clarity with regard to the staff quality to be

employed by MFIs.

B. Suggestions for augmenting credit flow to SHGs

75. Growth strategy of the Government resulted in increased opportunities to the

poor and this necessitates higher quantum of production/investment credit. The

above coupled with the need to meet various consumption requirements, the

credit requirements have increased at a faster pace. However, the bank credit is

not keeping pace with the increase demands. Per group finance in the last year

was at about Rs 1.60 lakh. As the credit flow is not adequate, the poor are

increasingly resorting to high cost credit ( at rates exceeding 30%) from MFIs andother money lenders which are pumping more money into the hands of poor in

addition to levying charges like service, processing and insurance, adversely

affecting the poor. SHG bank linkage is a direct means to provide credit to the

poor without intermediaries. It is essential to improve this credit flow since it

offers cheap credit without cost of intermediation. The artificial limits


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imposed on the amount that can be lent to SHGs shall be removed . The

credit flow should be based on a scientific exercise of identifying investment

opportunities done as a joint exercise with the Bankers.

Differential Rate of Interest (DRI) Scheme

76. Under the scheme the banks are advised by RBI to extend loans under DRI,

where the loans are required to be extended at an interest rate of 4%, to the tune

of 1% of the total loan outstanding as at the end of preceding financial year. The

loan under the Differential Rate of Interest scheme has been enhanced from Rs

15,000/ and the limit of the housing loan to Rs 20000/ per beneficiary. Borrowers

with annual family income of Rs.18000 in rural areas and Rs.24000 in urban areas

and semi-urban areas will now be eligible to avail of the facility. The outstanding

credit as at the end of 2008-09, for which information is available from RBI, was

at Rs 214101.83 crore in respect of all scheduled commercial banks excluding

RRBs and Cooperative banks. The amount which can be lent by banks in the State

of Andhra Pradesh works out to Rs 2141.01 crore. As may be seen theachievement under DIR even at all India was only at Rs 753 crore. Thus there is

ample scope for extending loans under DIR in the state of Andhra Pradesh more

particularly to the following categories. There are many SHGs with poorest of the

poor exclusively. All these groups could be given loans under DIR for productive

purposes. In view of the loan ceiling of Rs 0.15 lakh per member under DRI

scheme a SHG taking up only IGA can avail a loan upto Rs 1.80 lakh. However, if

they avail of loans for construction of houses a SHG would be in a position to avail

a loan of Rs 2.4 lakh.

Bulk finance to Mandal Samakhyas


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77. The SHGs in the State of Andhra Pradesh have been federated at Village level

as Village Organisations (VO), which in turn are federated at mandal level as

Mandal Mahila Samakhyas (MMS). While the VOs have about 30 SHGs, about 25-

30 VOs are federated into MMS. Zilla Samakhyas are formed by federating MMS at

district level. The objective of such an effort is to make these institutions self

governed, self managed and vibrant institution and thus facilitate community

participation to serve the poor effectively. These federations at different levels

including MMS have been registered under Mutually Aided Cooperative Societies

(MACS) Act1995. There are 36391 VOs, 1099 MMSs and 22 Zilla Samakhyas

functioning in the state of Andhra Pradesh. The MMSs have been providing both

financial and non-financial services to the affiliated SHGs. The non-financial

services extended include monitoring of SHGs functioning, VOs functioning,

extending services for book keeping and promotion of livelihoods. The MMS have

Community Investment Fund with them, which is considered as their own fund,

are also extending finance to the SHGs. They are also extending insurance

services to members.


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Need for financing Mandal Mahila Samakhyas

78. Financing MMS could be done for meeting credit needs for taking up IGA

which have short business cycle as also health and education. The loan could be

in the form of OD or working capital term loan so that the MMS could lend to

the needy clientele and recycle the funds effectively. Presently, MMS with about

1000 SHGs and 10000 members would offer the business volume required.

Intention is to make the MMS a micro finance hub at mandal level so that it would

be in a position to offer both financial and non-financial services to their members

more effectively. The loans need to be given mainly for IGAs with short term


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business cycle and based on repayment capacity. Equal distribution of bank loan

must be avoided, as loans will be sanctioned as per MCP.

Loans to Producers Cooperatives/ companies

79. There is a need for producers cooperatives/companies by the SHGs and for

taking up a specific activity on project mode to ensure poverty alleviation on a

sustainable basis. Financing these cooperatives/companies would enable taking up

the activities in an integrated manner.

Debt Swapping of MFI loans

80. As the debt burden of MFI borrower is very high, the banks may consider debt

swapping of the high cost MFI loans and replace it with SHG Bank linkage loans

which would help in recovery of loans from MFIs by the banking sector.

Earmarking credit to SHGs

81. The RBI guidelines stipulate that credit to women shall be 5% of the net credit

flow from the banking sector. It is suggested that of this about 50% may be

earmarked to SHGs.

Other issues in credit flow to SHGs


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82. While banks have been extending credit, certain lending practices adopted by

banks are detrimental to the interests of SHGs and defeats the very purpose of

microfinance. These are discussed below.

Banks should encourage cash credit, term loans to the needy SHGs There is considerable time lag in renewal or enhancement of limits to SHGs. Banks are not allowing withdrawal of funds from SB accounts of SHGs and

thus preventing internal lending of their savings; such a practice is affecting

the functioning of SHGs adversely.

Banks are compelling SHGs to buy insurance products though the StateGovernment is implementing various insurance schemes for the benefit of

SHGs.

Banks are fixing repayment schedule but SHGs are advised to repay earlyleading to pre-closure of loans; they need to fix a repayment schedule

based on cash flows and allow SHGs to repay as per the schedule.

Banks are holding part of the loan amounts in fixed deposits depriving themof part of the amounts and increasing cost of funds.

There is delay in release of sanctioned loans. Charging of service charges and inspection charges on loans to SHGs.

Interest rate cap on MFI lending

83. There has been a debate on whether the interest rates charged by MFIs can

be regulated by Government. Considering that State Governments have been

regulating interest rates being charged by money lenders, there is no reason why

the State Governments should not be regulating the MFI lending rates. We

propose that a cap of 8% on the interest rate spread may be imposed on


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interest rates being charged by MFIs. Implementation of this maximum cap on the

interest rate spread is best done by State Governments which have the machinery

to verify the situation in the field.

Conclusion

84. The Government of AP strongly feels that the activities of MFIs shall be

regulated by the State Governments for which a model Law can be prepared on

the lines of Laws for regulating money lending. The role of MFIs shall be limited to

the areas or households which are facing financial exclusion. MFIs shall exist for

the sake of the poor; and not the poor for the sake of MFIs. For all the households

or areas which have achieved the direct linkage with the banks, the flow of credit

from banks to such areas shall be improved by basing it on credible business

opportunities.

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ap government views on microfinance-malegamcommittee

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