The time to act decisively has come now. The RBI, Ministry of Finance, the Andhra Pradesh government, MFIs and other stakeholders must get into mission mode and set a number of checks and balances in place to overcome the huge unfolding crisis which is likely to completely distort or destroy the low income rural economy

The deadline for providing feedback to the draft Microfinance Bill put up on the website of the Union Ministry of Finance was over on 7th August. It is 'feedback analysis' time now with regard to the Bill. How long the Bill may take to become an Act is unclear, but the ground situation is indeed deteriorating and more importantly, the low income economy is slowly but surely getting devastated due to money-lending by field staff/agents and several other factors including lack of institutional funds for the low-income segment.

Therefore, while it may be appropriate to continue debating about microfinance regulation and its potential to solve the present crisis, let me also warn you that there can be no lasting solution to the present problems in Indian microfinance unless the following short-term issues are tackled expeditiously. And irrespective of whether and when the RBI (Reserve Bank of India) or a new regulatory authority takes charge of Indian microfinance, there is indeed a pressing need to deal with aspects such as those identified below.

First, in real terms, many of the MFIs (microfinance institutions) in India have large holes in their balance sheet and especially, the ones headquartered out of Andhra Pradesh. While an NBFC (non-banking finance company) MFI like BASIX may be able to get a lifeline, the others are unlikely to get such help. And given that the contagion is slowly but surely spreading to some of the neighbouring states, it is only a matter of time before which these other MFIs will also have huge gaping holes in their balance sheets. Therefore, without resolving the crisis in Andhra Pradesh and other parts of India where it is gaining momentum, let us be clear that no bank will seriously lend to MFIs (in the future) irrespective of any direction from any authority whosoever. And without such bank funding, MFIs cannot really survive, let alone expand. This is a very realistic assessment in my opinion.

Second, please also recall that three large NBFC MFIs headquartered in Andhra Pradesh had opted for debt restructuring while the cash rich SKSMLⁱ  is said to be going in for private (institutional) placement of its equity. While some of us may think that the debt restructuring and/or access to (some) equity funds would help resolve the crisis, at best, these are strategies for merely postponing the occurrence of the large gaping hole in the balance sheet of various MFIs. And this is something that all the banks are aware of and so, large-scale financing of MFIs is unlikely because of this aspect as also due to the solid image beating that microfinance has received in the last 12 months. In fact, one banker whom I spoke to summed it up aptly: "How can we lend to these MFIs knowing very well that their balance sheets are due to take a huge hit, somewhere soon and also given the fact that many MFIs really need to get their house in order in terms of various systems, agents, multiple lending, shared clients and the like?"

I found the above remark interesting as it helped me become clear on the fact that overcoming the present microfinance crisis requires much more concrete action on the ground rather than mere talk of provision of some loan funds or equity to MFIs. Without doubt, it calls for fundamental changes in the way microfinance is practiced and as Dr C Rangarajan, Chairman, Prime Minister's Economic Advisory Council, said last year, the business model of NBFCs needs to undergo a radical change. And unless that happens, state governments cannot be carried along and as long as they are not part of the solution, Indian microfinance cannot and will not take off again. Make no mistake about that. Therefore, it is in everyone's interest to introspect with integrity and come up with an optimal solution to this crisis and I believe that this is indeed possible. And accordingly, I offer some initial (suggested) proposals towards:

1.    Identifying shared clients/JLGs with multiple loans: A quick and fair identification of all clients with multiple parallel loansⁱⁱ  and high levels of indebtedness and their associated JLGs (Joint Liability Groups)/SHGs (Self-help Groups) across all districts in Andhra Pradesh and other states needs to be done immediately. The RBI must lead in this effort and ensure a high level of openness among all the stakeholders participating in this exercise. Further, disbursement of standard (consumption) microfinance loans to such clients (from various sources) must be stopped immediately and they must be provided other appropriate interventions as identified in point 2 below.

2.    Deal practically with clients having multiple loans: Practical approaches need to be evolved for dealing with clients who have several loans and are facing a high level of indebtedness. Among other things, this calls for objective and candid engagement among various stakeholders including client representatives, MFIs, banks, investors, the Ministry of Finance, state governments, regulators and others concerned. If this is not done, the crisis will surely erupt again as many low income people with debts greater than Rs1,00,000 are in no real position to pay back their loans from their own (known) sources of cash/income. They are the classic subprime cases like clients from whom money was (is) being recovered, if at all, through regular greening (top-up loans) and other coercive collection strategies.

Given that both of the above should not be encouraged, we need to evolve practical approaches for mitigating the indebtedness of such clients through strategies such as the following: (a) debt swap which could also involve banks/MFIs completely taking over a clients' loan dues and/or banks taking over an MFI (acquisition); (b) moratorium on interest/principal for a specific period of time; (c) rescheduling/restructuring of loans with a longer repayment period and changes to other loan terms; (d) partial or complete waiver of loans in cases of the ultra poor (those with extremely poor livelihoods and high levels of poverty/vulnerability and no serious means to repay their huge loans); (e) access to livelihood loans, especially post production or post harvest; (f) access to risk mitigating and vulnerability reducing financial services and so on. However, these are not exhaustive suggestions but rather indicative ideas which need to be explored further, consensually developed and practically implemented on the ground.

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