Microfinance makes a re-entry into AP and Telangana

In October 2010, when the then undivided government of Andhra Pradesh decided to pass the Microfinance Corporation of Andhra Pradesh Act, it brought down the doors of microfinance businesses in the state. MFIs have almost been a bad word for banks and non-banks ever since.

But after more than two decades on the hiatus, that is set to change.

High level sources say Business line That at least three microfinance banks (SFBs) are evaluating the possibilities of opening MFI centers in the two states. Another large NBFC-MFI is also testing the waters as mentioned by the source and is currently in the process of hiring field staff for the states. By the end of fiscal year ’24, at least eight financial institutions are expected to start operations in the United States.

At the moment, there are four players in this field: Spandana Sphoorty Financial, Bandhan Bank, IDFC First Bank and Fincare SFB. Earlier in April 2023, Muthoot Microfin, the microfinance subsidiary of Muthoot Finance, said it is set to enter Andhra Pradesh, and Telangana in this fiscal year.

The improved sentiments are due to the judgment on February 14, 2023 of the Telangana High Court. As per the Supreme Court ruling, non-profit financial companies operating in the states of Andhra Pradesh and Telangana that are registered under the authority of the Reserve Bank of India will not be subject to local government legislation. This ruling, which was positively viewed by the industry, entices players to re-enter the AP and Telangana markets.

Improve discipline

According to Padmaja Reddy, Founder and former Managing Director of Spandana Sphoorty Financial, an NBFC-MFI, who currently heads Keertana Financial Limited, its most recent venture, doing MFI business should not be viewed negatively any longer in the two states.

“During de-trading, when credit loss to the industry was 5 to 15 per cent, for Spandana Sphoorty, it was zero in Telangana and Andhra Pradesh,” she explains. She is quite frank that the credit discipline of borrowers has also changed dramatically since the infamous AP crisis of 2010. “There is a realization among borrowers in both states that they should not get carried away by the promises of local politicians and should not default on loans obtained from MFIs. Right now, they only have access to banks and self-help groups.”

modified operating model

Even in terms of operations, there appears to be a change in approach. “Today, whether as SFB or NBFC-MFI, the options for doing direct lending to customers are increasing. As lending institutions, we also prefer individual loans over the JLG, or joint liability group model. In this way, as lenders, we can create and ensure a direct link between ourselves and the borrower. It removes space for potential political interference, said the CEO of a microfinance bank.

According to another CEO of SFB Bank, the bank is studying the possibility of providing small loans to meet the needs of the MFI sector after testing its banking operations in the states for 3-4 years. “We already have branches in AP and Telangana, and we are looking forward to extending loans from MFIs through these branches,” he said.