The 2010 crisis in Andhra Pradesh has halted the rapid expansion of the Indian micro-finance market, causing a large number of micro-finance institutions (MFIs) in the state to become unsustainable.
A study from the Microfinance Information Exchange (MIX), which collects data on over 90 Indian MFIs to understand the impact of the crisis on the market, shows that a deceleration in the market through March 2011. With risk levels still high, the study concludes that the growth of MFIs will remain slow, or may even decline.
Washington-based MIX is a non-profit organisation with offices in Azerbaijan, India, Morocco, and Peru. Its global partners include Bill & Melinda Gates Foundation, CGAP, Omidyar Network, The MasterCard Foundation, IFAD, Michael & Susan Dell Foundation, Citi Foundation, Ford Foundation and Deutsche Bank.
The MIX report said returns were not insulated from the Andhra Pradesh crisis and, as expected, the weighted average return on assets dropped to 1.9% against 4.4% in the previous year. Return on equity, similarly, fell from 26% to 9.5% in 2010, as increasing costs added pressure on margins. Rising defaults by Andhra Pradesh clients added to the woes of the sector and had nationwide effects, increasing loan write-off and provisioning costs.
Financing expenses also increased due to rising borrowing costs and the inability to raise funds for growth. Incidentally, MFIs have been borrowing at higher interest rates compared to their counterparts in South Asia. In 2009, the weighted average interest rate on approximately $3.5 billion outstanding debt held by MFIs was just under 12%, with the weighted average term at 42 months.
Growth rates for both loan portfolios and clients in fiscal year 2010 were a mere 17% each, compared to growth rates of 95% and 57% in 2009. Although the sector growth did not stop completely by March 2011, it did slow down dramatically. However, Andhra Pradesh and most other states showed declining portfolios after March.
As of March 2011, the weighted-average portfolio-at-risk rose to an all-time high of over 25%, from below 1% the year prior. Loan write-offs also increased to 3% from a mere 0.6% for the same period a year earlier. As the 2010 fiscal year had only six months of post-crisis results, a larger write-off is expected in the coming quarters building up to March 31, 2012.