Microfinance warns of collapse over credit freeze

India’s microfinance industry has warned it is being pushed to the brink of collapse, as a result of a bank freeze on credit to microlenders triggered by a political crackdown.

India’s commercial banks, which normally provide about $133m a week in credit to the microloan industry, have frozen those dispersals for the past two weeks, as companies wrestle with a backlash in one of their biggest markets, the state of Andhra Pradesh.
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Industry executives have warned that if the uncertainty does not end, and credit flows do not resume, many companies could be forced to close in the next few weeks.

“We are heading towards a financial crisis in our organisation,” one executive wrote to the Microfinance Institutions Network, which represents 44 microfinance companies. “Cash flows are getting worse day by day . . . We cannot sustain this for long. We will be dead very soon.”

India’s microfinance crisis began in Andhra Pradesh, where microlenders have about $2.7bn in outstanding loans to 6.7m borrowers. That accounts for about 30 per cent of India’s total microlending portfolio.

After a series of suicides that local politicians blamed on harassment by microfinance debt collectors, state authorities passed an emergency ordinance to crack down on the sector, including an abrupt order to suspend collections this month.

Despite a court ruling on Friday permitting companies to resume collecting operations, industry executives say they are still being obstructed by local authorities, police and political workers. Many borrowers appear to have stopped repayments in the expectation of an imminent loan waiver.

The crisis that began in Andhra Pradesh threatens to spill over to the entire sector, with other states already feeling ripples against the industry. That could trigger a wave of bank defaults nationwide and a rural liquidity squeeze.

“If credit doesn’t resume, it triggers systemic risk for the banking sector,” said Sajeev Vishwanathan, chief executive of Basix, a microfinance company. “It will be a cascading effect, starting with Andhra Pradesh and spreading.”

India’s commercial banks, including state banks, private banks such as ICICI and HDFC, and foreign banks such as Citibank and Standard Chartered, have a total exposure of about $6bn to the microfinance sector – equivalent to 20 per cent of the Reserve Bank of India’s daily interbank clearing volume.

The rapid growth of the microlending sector, which has been expanding at about 70 per cent a year for the past five years, has boosted rural liquidity, helping support a rural consumption boom that has buoyed India’s economic growth.

Kurapati Venkatnarayana, a Kakatiya University economics professor who has studied overindebtedness in Andhra Pradesh, said India’s state banks should step in to provide rural liquidity. “Now there is a credit gap,” he said. “Unless further remedial measures are taken, the crisis can deepen.”

In New Delhi, Pranab Mukherjee, the finance minister, said he had written to the chief minister of Andhra Pradesh recommending “corrections” to the ordinance.

However, he said he had no plans to introduce a separate regulator for the industry, saying the RBI was sufficiently vigilant.

“We are not currently thinking about any regulator right now,” he said. But he urged microfinance companies to avoid charging “abnormally high” interest rates or using coercive methods to ensure repayments.