MFIs in Karnataka may face fresh recovery challenges

Karnataka, which accounts for about 10% of India’s mainstream microfinance market, may throw fresh challenges for microfinance lenders operating in the state as the local government plans an ordinance to regulate the business practices related to recovery from the politically significant class of small borrowers. The Siddaramaiah government last Saturday announced its plan to bring an ordinance to protect borrowers against coercive loan recovery methods, which have reportedly led to suicides. The ordinance is likely to prohibit lenders from outsourcing loan recovery functions.

“This has created anxiety in the sector. Our apprehension is that heightened police action against coercive recovery practices by some unscrupulous entities may hamper regular recovery follow up, which may dent asset quality further,” said VN Hegde, chief executive of the Association of Karnataka Microfinance Institutions (AKMI).

According to data collated by credit bureau CRIF High Mark, the total microfinance loan outstanding in Karnataka was Rs 39,175 crore at the end of November last year, out of the total microfinance market of Rs 3.93 lakh crore. The gross non-performing assets ratio in the state was 6.4% at the end of November, against the industry average of 13%.

Separately, the Shri Kshethra Dharmasthala Rural Development Project (SKDRDP), a charitable trust working as business correspondent for banks, has loans outstanding of Rs 24500 crore.

“At present, the loan recovery rate in the state is in line with that of last month. We don’t see any further challenge,” said Sadaf Sayeed, chief executive of Muthoot Microfin. The talks of an ordinance, which is an executive order, have brought back memories of similar executive intervention in the undivided Andhra Pradesh in 2010. To be sure, any ordinance now would have limited impact on microfinance business as the Supreme Court has declared that the Andhra Pradesh Micro Finance Institutions (Regulation of Money Lending) Act, 2011 and the Telangana Micro Finance Institutions (Regulation of Money Lending) Act, 2011 would not apply to the lenders regulated by the Reserve Bank of India (RBI).

However, the challenges remain within the sector due to high borrower leverage, dilution of the group-based model, poor center meeting attendance and high attrition.

“Ordinance or no ordinance, the situation may turn worse as the overall repayment culture has gone for a toss,” said Padmaja Reddy, managing director of Keertana Finserv. “During the time of demonetisation and the pandemic, the industry had given loans to defaulters. So, the borrowers nowadays expect to get loans even if they default. Also, it will be difficult for the ones to repay who took loans from multiple lenders. You would find one microfinance borrower also taking loans from a gold loan company, from a fintech company, from a consumer loan company.”

AKMI held an emergency meeting Tuesday to plan a course of action to recover the dues from errant borrowers.

“We need to draw a loan restructuring plan for the people who over-borrowed. Otherwise, the money can’t be recovered,” a veteran microfinance practitioner said.