For each of the last eight years, Spandana reported growth in excess of 100%. Yet, today, it stands pushed to the brink, by the very state that embraced it in the first place: Andhra Pradesh .
Half of Spandana's Rs 4,000 crore lending is to borrowers in Andhra. Over the last three months, says Narain, it has not received a penny on about Rs 1,300 crore of those loans. The freeze is the fallout of a state law that was drafted in the wake of borrower suicides, allegedly because of coercive practices of MFIs. The law was intended to check MFI excesses, but it has ended up checking all MFI activity.
Micro-loan borrowers, mostly poor women, were already distressed because of a dip in their incomes and the multiple loans they were servicing. Cushioned by the new law, provoked by local politicians and emboldened by the prevailing climate of antipathy towards MFIs, they have stopped repaying.
"The industry is based on expectations," says Sanjay Sinha, whose company does credit ratings for MFIs. "When borrowers expect more loans, they will repay. But when they know they won't receive more, they will stop repaying." That's what a majority of borrowers have done in Andhra, pushing a large, profitable, cash-rich MFI like Spandana to the edge.
If that's the plight of India's second largest MFI, half of whose portfolio is locked in Andhra, how are smaller MFIs with an equal or larger exposure to the state doing? Even worse. They could tip over anytime. "Our money for repayment of bank loans will run out in January," says Kishore Kumar Puli, managing director, Trident Microfin, 70% of whose Rs 160 crore loan portfolio is in Andhra.
"I foresee nothing less than the death of the small MFI," says SC Hassain, president and CEO of Star MicroFin Service Society, whose entire Rs 20 crore loan portfolio is in the state.
Judgement day is two days away. January 15 will be three months since Andhra issued the contentious 10-page ordinance. In the lending business, three months is the first threshold of failure — that's when lenders have to start making provisions for bad loans, which reduces their profits. Unless normalcy returns in Andhra, for both MFIs and banks, the signs are ominous.
So far, MFIs have been seeing a shortfall in interest income and cash, since October. A report by credit-rating firm Crisil, released in November, said collections in Andhra had fallen below 20% of the loan amount due, from 99% just before the ordinance was issued. Some MFIs say the collection rate has fallen further.
Star MicroFin Society is a small NGO-MFI, with a loan portfolio of Rs 20 crore in Kurnool and Ananthapur districts in Andhra. It has 35,000 borrowers, 100 staff members and 11 branches. "In our 15 years, we always had 100% repayment," says Hassain. "Now, our repayment is down to zero in urban areas and 2% in rural ones."
Similarly, Trident has seen its collections in Andhra drop from Rs 22 crore in September to Rs 17 crore in October, to Rs 2 crore in November, to Rs 1.6 crore in December. The income and cash shortfall was the first hit for MFIs, and will show up in their results from the December quarter.
January 15 onwards, MFIs will feel the second hit: provisioning. Under the rules set by the Reserve Bank of India, the central bank, if an MFI does not receive interest income for three months, it has to provide for 10% of the loan amount. By a crude calculation, for Spandana, that works out to be about Rs 133 crore - 65% of its net profit for 2009-10.
