The Andhra Pradesh Small Micro Finance Institutions Network, a network of 25 small MFI groups, is reeling under pressure from banks along side facing rough weather from its defaulters. The association, which operates in two to three districts, and a few mandals in the state, has loan dues the tune of R300 crore to banks and R250 crore due from its borrowers. Due to failure of restructuring of loans by banks, heads of two MFI groups committed suicide recently in the state. Also, the borrowers are also refusing to repay and are getting political support in the wake of a byelection in the state. Explaining the situation V Purnachandra Reddy, president of AP Small Microfinance Network, tells BV Mahalakshmi that while the bigger MFIs are securitising their loan portfolios to maintain liquidity, smaller MFIs are caught in the vicious circle of bad loan recoveries and undue demand from bankers. Excerpts:

What is the primary cause for the two recent suicides and survival of smaller MFIs in the state?

The primary cause is the AP MFI Act of the AP government. There is no way to collect outstanding amounts and repay the banks and with little assistance from regulators, smaller MFIs are now financially impaired, some are on the brink of bankruptcy even though a few others have scaled back their operations. We are reeling under severe pressure, which is making our member MFI heads to go the extent of committing suicide. We have made several representations to the finance ministry and RBI, but there seems to be no support because we are a small organisation. While bigger MFIs, which have multi-state operations, did get relief through debt restructuring, we operate only in this state and there is no relief for us. Incidentally, even the state government is not considering our repeated pleas to restructure loans or even merge our operations with the Stree Nidhi movement of the state.

Ever since the AP state government brought restrictions on micro-finance activities, the poor borrowers have been deprived of low-cost loans to expand their smaller businesses. Now, they have fallen into the trap of private moneylenders who are charging a whopping 120% interest rate. The government is restricting MFIs for 24% simple interest, but they cannot have any control over private moneylenders who are charging 120%.

What is the current loan portfolio and nature of pressure on banks?

We, the smaller MFIs (about 100 such MFIs that operate with less than 10,000 beneficiaries) have a loan portfolio of R300 crore are being forced by the banks to repay the bulk loans along with penal interests. The banks ? Axis, Bank, Canara Bank, State Bank of Travancore ? are trying to auction the properties mortgaged to them and forcing them to incur huge expenses on legal battles. This is all for no fault of ours, but due to the draconian Act brought in by government without real assessment of the sector.

What is your next line of action?

Bankers on their part should have asked the government to hold on to the Act till the money is recovered from MFIs, particularly smaller MFIs, which are really serving the needy with customer user-friendly approaches. On other hand, banks started giving direct loans to the same borrowers without even insisting on no-due certificates from MFIs. All this wrongful approaches and methods have victimized the small MFIs in general and poor borrowers in particulars beyond damage control.

We were giving small collateral free loans up to R20,000 per household for their immediate working capital needs and purchase of micro-capital goods. In the process, we were acting as retailer loan distributors to the wholesale bulk loan providers that are banks and other companies. The said loans were classified as priority sector loans by the banks and were treated as bulk loans for lending to micro borrowers in their books. With the promulgation of AP Micro Finance Institutions (Regulation of Money Lending) Act, MFIs were forbidden from visiting the households for recovery and fresh lending also. The smooth transactions were seriously hampered with lot of restrictions on borrower selection, loan application process, and lending and loan recoveries. As consequence all our service and credit operations came to stand still. The loan overdues piled up in our books as the borrowers were reluctant to pay with the confusion created by the new Act with retrospective effect. The immediate impact is clearly visible with the denial of collateral free loans to poor and also regular repayment to our lenders that are mostly public sector banks and social sector bulk financial services providers.

In the past 20 months, after promulgation of the Act, we could hardly recover less than 5% of our loans and consequently, we turned defaulters to our lenders. With the lenders? pressure, we have no means but to seek legal action for recovery from poor borrowers by filing cases in courts for recovery. Smaller borrowers neither have where withal to repay or bear the burden of legal expenses. They have taken collateral free loans and if our lenders exert pressure tactics, it may directly and indirectly result in undesirable social consequences like suicides and unrest by small borrowers.

Do you see any immediate remedial measures?

We have pledged/mortgaged properties which are being moved in the courts for Auction. The very essence of micro loans is that they are collateral free. We have mortgaged the properties to create faith and credibility. While treating their loans as priority sector advances in their books and when we have helped the banks with enormous outreach at a very low cost, it is very unfair to execute mortgage deeds for overdue loan recoveries which are not our fault at all. Our loan defaults are not intentional, but consequence of the Act. Hence, it is highly injustice to executed mortgages for loan recoveries. We have also deposited 10% of loan amount as margin money deposit with the bankers, which was to be refunded to bankers. But bankers are now appropriating the margin money to the loans while we are helplessly held up in tackling our loan defaulters. The loan default is to be owned by bankers as it is the Act that has come in our way of smooth operations and we are no way responsible for this fall out.

Did you approach the finance ministry or RBI Ombudsman in this case? What has been the response?

RBI has observed that the crisis in AP is due to environmental factors, but not due to their individual MFI failure or lapses. It has further advised the banks to continue support to MFIs and has also allowed restructuring of loans and CDR, usually reserved for companies that have caused their own downfall. While many of these restructuring packages have support only to big MFIs, it could not provide respite for small MFIs since their operations are confined to only AP and they have no way to collect outstanding loan amounts with the existing situation and pay to lenders as per restructuring mandate. However, some small MFIs though they are having difficulties with banks in restructuring the payment of overdue as a pre-condition for restructuring of loan, which is contrary to the intention of RBI, complied the same with great difficulty and went to restructuring. As the recovery situation has not improved since then, as the ground realities and factors have not changed, small MFIs, especially which do not have multi-state microfinance operations, are not in a position stand with restructuring mandate. Hence, the way forward is to approach the ombudsman.