The clan of Microfinance entrepreneurs had shrunk in the wake of the Andhra

Pradesh (AP) microfinance crisis of 2009-10, triggered by a series of borrower

suicides, allegedly on account of unscrupulous MFI (microfinance institutions)
practices of
1. Charging high interest rates
2. Excessive lending
3. Indebtedness among poor borrowers
4. Use of Coercion to recover those loans.

Effect of AP crisis on the Industry

1. Asset under management (outstanding loans or gross loan portfolio) fell

Rs 3,000 crore to close at Rs 20,500 crore in 2011-12.
2. MFIs that had large-scale operations in AP suffered the most.
3. Non-repayment of loans by borrowers (at the behest of politicians and
other community leaders) resulted in AP portfolios of most MFIs
declining by 35%
4. Post the AP crisis, there was a massive overhauling of practices. MFI
were brought under strict rules and regulations.
5. Due to political interventions the industry could not even get in touch
with borrowers who were willing to repay
6. We had to shrink our loan book to make up for our losses in AP. Out of
the Rs 1,496 crore we loaned out to borrowers in AP, we could only
collect Rs 130 crore. We had to write off loans worth about Rs 1,300
crore over several quarters
7.

Good effects due to regulations

1. Of the 10 small finance bank licences given by RBI in 2015, eight were
bagged by MFIs. And a bunch of MFIs are now preparing to launch IPOs.
2. The AP State Government Ordinance imposed stringent operating
guidelines — mainly tightening screws around lending rates and
collection mechanisms employed by MFIs till then

Difference between bank and MFI

"Pure MFIs have more linkages with customers at the grassroot level. Banks
do not have the bandwidth to match the development focus of an MFI
Steps taken by RBI
Benefits Of RBI regulations

1. Gave industry Blueprint to operate

“There were no models or reference points in terms of lending rates or
how much we could lend," says Equitas' founder PN Vasudevan, adding,
"these mandates came only after the crisis; it gave the industry a
blueprint to operate. “

Present Day scenario

The Indian microfinance industry is dominated by NBFC-MFIs with an 88%

market share.
These institutions have been grouped on the basis of their 'gross loan
portfolio' (GLP).
As per Microfinance Institutions Network (MFIN) data, there are 18 small MFIs
with GLP less than Rs 100 crore, another 18 medium-sized MFIs with GLP
between Rs 100 crore and Rs 500 crore and 20 large MFIs with loan book
above Rs 500 crore
Large MFIs account for nearly 90% of industry GLP. Even though the number
of active MFIs has fallen from about 70 in the pre AP crisis era to just about 55
currently, the industry loan book has leapfrogged 130% to Rs 47,200 crore in
2014-15. Average loan ticket size (first disbursement) has also grown from Rs
14,800 to about Rs 18,000

Targeting new customer base

Post the crisis, MFIs started spreading out their activity to newer territories.
Instead of focusing on captive borrowers (which was banned by RBI when it
introduced the 'twolender rule), the industry started approaching newer set of
borrowers. This strategy widened their customer base. Borrowers too, warmed
up to MFIs they had no other source to get non-collateralised debt.

Now, MFIs can charge a margin of 10% and add up cost of funds (margin of
10% + cost of funds) as interest on their loans. This formula pegs rates at 23-
24%.

"MFIs are trying to reduce their costs and mark up profitability by increasing
loan volumes. This is turning out to be a good strategy as a few large funds
have managed to bring down their rates to as low as 19-19.5%
Industry is reaping benefits of enhanced collection efficiency, which is
currently upwards of 95%.
A lot of technology is now being used to streamline and make the collection
process more efficient. Almost all leading MFIs use digitized data... Manual
entries have gone out completely at least at the ground level," he says.

The industry is also making good use of credit bureaus to weed out
delinquent borrowers and restrict over-lending to borrowers. As per RBI
rules, a borrower should not get loans from more than two MFIs. The industry
keeps a tab on this rule ('two-lender rule') by referring to credit bureau
records. "MFIs are using our services for all loans disbursed at their end

MFIs are moving away from time-tested southern states to newer areas in
North and North Eastern states