Rogue elements who have penetrated the microfinance sector to extract huge profits by lending to unsuspecting poor at exorbitantly high rates of interest will now find it difficult to work in Andhra Pradesh. The state government has decided to file criminal cases against microfinance institutions (MFIs) that resort to coercion and use ‘inhuman’ means to recover loans extended to the poor. It will also invoke the provisions of the AP Money Lending Act to ensure MFIs do not fleece customers with high interest charges.

“The cost of funds for most MFIs will be 9-10 per cent but they are charging ridiculously high interest rates, sometimes up to 40 per cent a year,” said R Subramanyam, principal secretary, panchayat raj and rural development department.
Many MFIs are growing by poaching self-help groups (SHGs) members, he said. Many also do not do due diligence before extending loans and this leads to multiple loans to consumers and, in turn, results in higher defaults.

The state government recently formed a task force led by collectors at the district level to look into the issue. The report is expected soon.

Mr Subramanyam said, there were instances of recovery agents pushing women into flesh trade, forcing them to stand in the hot sun for about four hours and seizing their ration and aarogyasri cards. “These activities will not go unchallenged.”

However, he said, some of the MFIs were doing good work and the government will associate with them for financial inclusion.

The total outstanding by MFIs in the country is about Rs 30,000 crore. Andhra Pradesh contributed about 40 per cent to this. The defaults are in the range of 1 per cent to 1.5 per cent. There are about 1.2 million rural households and over 935,000 SHGs in the state. There are about 300 MFIs operating in the state.

According to an official of the Society for Elimination of Rural Poverty, the MFIs are splitting the SHGs to form a new group with active members selected from the parent groups.

The government spends up to Rs 5,000 for forming an SHG with 18 or more members, their capacity building, HR training, providing bank linkages and others. The MFIs save this amount by poaching SHGs’ members.

Most MFIs collect upfront non-refundable registration charges and insurance costs while giving loans. The loan repayment is typically in 50 weekly instalments. “Though no collateral is needed for microfinance, many are collecting promissory notes from individual members,” the official said.