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10 million poor rural borrowers in AP may soon be labelled defaulters

Millions of rural poor borrowers in the state are running the risk of losing access to formal credit.

, ET Bureau|
Updated: Dec 28, 2011, 03.23 PM IST
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HYDERABAD: Even as the Reserve Bank of India (RBI) attempts to address a large part of the concerns of the Andhra Pradesh government pertaining to the microfinance sector through a comprehensive regulatory framework, millions of rural poor borrowers in the state are running the risk of losing access to formal credit.

This is because, AP, the southern state that accounts for a third of the Rs 30,000-crore Indian microfinance sector, is now set for another unsavoury distinction of labelling the highest number of rural women borrowers as defaulters since they didn’t repay tiny loans of microfinance institutions (MFIs) for over a year or so.

The AP government had promulgated a state law in October last year prohibiting MFIs from collecting weekly repayments and reaching out to borrowers at their doorsteps, apart from making government approval mandatory for every second loan to a borrower. This was followed by a spate of suicides by poor borrowers allegedly owing to coercive recovery practices by MFIs.

As MFIs found it difficult to step into most of the AP villages for lending or recovering loans, the collection rates of most of the MFIs, including SKS, Basix, Spandana and Share Microfin, fell to below 10% from over 98%, badly impairing the credit repayment culture.

All the MFIs have uploaded the credit history of nearly 10 million customers in AP, who did not repay the tiny loans they availed, on to the three credit information bureaus, said Alok Prasad, chief executive officer of Microfinance Institutions Network (Mfin), the lobby body of Indian MFIs.

As per the norms, borrowers with a history of loan defaults will be forced to pay more or even be denied bank credit based on the credit scores or credit worthiness assigned by the credit information bureaus that act as repositories of information about the credit history of borrowers.

Interestingly, it was the AP government that had mandated MFIs to upload the borrowers’ credit history on to the records of credit bureaus in a bid to ensure that the MFIs access such credit records and avoid multiple lending as per the state Act.

“As we speak, AP today has over 9.2 million defaulters listed on the credit bureaus of this country. All the MFIs have uploaded their credit history to three credit bureaus – Cibil, Equifax and High Mark. It is a harsh reality and is painful that AP has the distinction of highest rural defaulters on the credit history of credit bureaus,” says Dilli Raj, chief financial officer of SKS Microfinance, India’s lone listed micro lender.

Though only the credit records of women borrowers belonging to joint liability groups of MFIs were being uploaded on to the credit bureaus so far, the process of uploading the credit records of women borrowers of self help groups (SHGs) under the bank-SHG linkage program may also take place sooner or later, said Alok Prasad.

As public sector banks, which extend credit support to women borrowers through SHGbank linkage route, begin to rely on the data of the credit bureaus, nearly 10 million AP women borrowers could be denied personal loans, he said.

“As most of these women members of SHGs had availed loans from MFIs and did not repay for over a year, the threat of all of the 10 million of them being branded as ‘defaulters’ by the banks is looming large,” said Prasad, who is peeved over the deteriorating credit culture in AP owing to political interference, which he considers one of the biggest overhangs for the microfinance sector.

He holds politicians, bureaucrats and government machinery responsible for the current crisis in microfinance and for depriving the poor from the much-needed credit availability.

“We have been expecting this kind of a crisis in the case of rural women borrowers in AP where they could be declared defaulters en masse,” said Shadab Rizvi, a Mumbai-based microfinance specialist at Darashaw & Co.

Blaming the political hooliganism for ruining the healthy credit repayment culture, Rizvi said poor borrowers shouldn’t be penalised for no fault of theirs.

He suggests the government to evolve a mechanism wherein women borrowers were granted exemption of at least a year to set right their credit records and improve their credit worthiness.

Reddy Subrahmanyam, principle secretary with the AP rural development ministry, admits that the defaults by women borrowers to MFIs may affect their standing to raise loans in their individual capacity but not as members of the SHGs.

“The women members of SHGs under the SHG-bank linkage programme currently get loans based on the credit history of the group and not the individual members of these groups,” he told ET.

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