The Andhra Pradesh crackdown on microfinance companies has driven an increasing number of poor borrowers in the State back into the arms of local moneylenders, a recent survey shows.

This is despite the higher interest rates charged by these lenders and the loan often not covering the full requirement. But with microfinance institutions (MFIs) abstaining from new loans in the State ever since the Microfinance Institutions (Regulation of Money Lending) Ordinance in October 2010 was introduced, there seems to be no other option.

A new study by financial services solutions provider MicroSave found that 59 per cent of the people surveyed in group sessions in Telangana, Rayalaseema and Coastal Andhra covering a total of four districts said they have taken loans from moneylenders in the absence of loans from MFIs.

Moneylenders have increased lending in the past eight to 10 months in areas with higher penetration of MFIs, according to the study. Furthermore, 37 per cent of the respondents had taken loans from self-help groups (SHGs) and 29 per cent from “daily finance corporations”, another form of moneylenders.

Interest rates

In terms of interest rates, SHGs were the most accommodating lenders in the State, charging 12-13 per cent. However, the amount disbursed by SHGs was often too small to meet the borrowers’ requirement. In contrast, the MFIs used to charge 27-45 per cent annually, including insurance. But compared to pawnbrokers charging 30-36 per cent and moneylenders or direct finance corporations demanding 36-120 per cent, MFIs were still a better option.

The difficulty in securing funds has put a damper on the business plans of many rural folk in the State. While 24 per cent of the respondents said they have postponed their expansion plans because access to credit was difficult, 32 per cent said they reduced the scale of their businesses in the absence of an alternate credit source.

Another 12 per cent resorted to the sale of assets such as houses, vehicles, cattle or jewellery to meet agriculture-related expenses, besides non-productive expenditure such as school fees or marriages.

The study also found that despite a good banking network in the region, most respondents did not like to source credit from them on account of inordinate delays, cumbersome procedures and complex documentation. But when it comes to accessing credit from alternate sources, about 66 per cent of the respondents at group sessions conducted by MicroSave in the State said exorbitant interest rates were the biggest “pain point”.

Furthermore, 41 per cent said loans taken from SHGs and banks were often inadequate. In addition, the time taken for loan processing by SHGs and banks was cited as a constraint by 24 per cent of the respondents, with a minimum wait time of one month that could stretch to six months.

Inflexible mfis

In this regard, a majority of the respondents indicated that they liked some of the features of MFIs and denied being harassed by them, even though they had heard of suicide deaths attributed to harassment by MFI staff. While 80 per cent cited timely delivery of loans as the best selling point of MFIs, 26 per cent liked the doorstep-delivery model. At the same time, 39 per cent asserted that the inflexibility in loan repayments to MFIs was a sore spot, since not even a single day’s grace period was given.

Whether there is scope for MFIs to make a comeback in the State is a moot point for the time being. Almost 90 per cent of the respondents said they were willing to repay their loans to MFIs if they start disbursing new loans and other members of the community start repaying. But the repayment rate for MFI loans is very low at present, ranging between 6 per cent and 12 per cent.

Most MFI clients stopped repaying as other members of the group and community stopped repayment.

There have also been instances of wilful defaulters putting pressure on prompt payers to stop repaying their loans. What is more, the media, local activists and influential members of the community have also played a major role in encouraging borrowers to default, leaving MFIs wary of the State, says the report.

>arvind.jayaram@thehindu.co.in

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