Microfinance Focus, December 15, 2011: Microfinance India – State of the Sector Report 2011, which was released at the Microfinance India Summit on Monday, states that the sector surprisingly recorded a positive growth during the year despite the massive problems of catastrophic nature in the state of Andhra Pradesh.

The SHG-Bank Linkage Programme and the Microfinance Institutions put together achieved a growth in their customer base by about 10.8 percent. The combined borrowing customer base increased to 93.9 million from 86.3million in the previous year.

The growth rate of MFIs in terms of customer outreach was 17.6 percent, which according to the report could be on account of vigorous growth posted in the first half of the year and also the fact that a number of defaulting customers in Andhra Pradesh (AP) are continuing in the books of MFIs.

Multiple lending, one of the major factors that led to the AP crisis persisted and the overlap of customers between SHGs and MFIs continued. After adjustment of overlap, the number of customers of microfinance is estimated to have increased by 8 percent, which is much higher than the growth rate of last year.

MFIs showed an increase of 13 percent in their loans however there is a possibility that between Rs 60-70 billion worth of MFI loans pertaining to about 5 million customers in Andhra Pradesh have turned delinquent.

The full impact of the Andhra Pradesh events is likely to be felt in 2011-12 as the sector has been starved of funds and many institutions had spoken of scaling down operations.

The first quarter of 2011-12 witnessed contraction in loan portfolios both on account of liquidity constraints and the compliance issues arising from regulatory guidelines of RBI on NBFC-MFIs, the report says.

Calling lending banks and financial institutions as fair-weather friends of microfinance, the report claims that the price of banks’ inability to come together and have a dialogue with the Andhra Pradesh government is about Rs. 70 million in loans to MFIs which had been restructured with very slim hopes of recovery.

A number of small and medium MFIs have reportedly closed down. Number of MFIs reporting data to Sa-Dhan has come down to about 170 from 264 last year.

The SHG programme has reported higher levels of default in AP. At the end of June 2011, about 228, 000 SHGs had defaulted on repayments (17 percent of linked groups) with loan balances in these accounts amounting to Rs. 22.9 billion.

The outstanding bank loans to MFIs reached a level of Rs. 126.8 billion which is about Rs. 13.3 billion less than the previous year’s level. SIDBI (Small Industries Development Bank of India) has also reduced its loan disbursements to MFIs, from Rs. 26.65 billion in 2009-10 to Rs. 8.4 billion in 2010-11.

Further, the investment climate has worsened with fewer equity deals and much smaller investment flows. Equity inflows fell from Rs. 9.4 billion in 2009-10 to Rs. 3.86 billion in 2010-11.

However, there are some signs of easing of equity loan funds flow in the second quarter of 2011-12, the report claims.

While a recovery is possible in the immediate future, in the long run, MFIs are likely to face stiff competition from banks through their BCs (Business Correspondents), a restructured SHG program and the impending roll-out of mobile-based financial services.