In October 2010, when the then-undivided Andhra Pradesh government decided to promulgate the Andhra Pradesh Microfinance Institution Ordinance, it brought the shutters down on the microfinance business in the State. MFI has almost been a sin word for banks and non-banks since.

But after over two decades of halt, that is set to change.

Highly placed sources tell businessline that at least three small finance banks (SFBs) are evaluating the possibilities of opening MFI centers in the two states. Another large NBFC-MFI is also testing the water said the source and is currently in the process of hiring field staff for the states. By the end of FY24, it’s expected that at least eight financial institutions will commence business in the States.

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

The improved sentiments are owing to the February 14, 2023, judgment by the Telangana High Court. According to the High Court verdict, NBFCs operating in the States of Andhra Pradesh and Telangana registered under the purview of the Reserve Bank of India will not be governed by local state enactments. This verdict, seen positively by the industry, is tempting players to re-enter the AP and Telangana markets.

Improved discipline

According to Padmaja Reddy, founder of Spandana Sphoorty Financial, a NBFC-MFI, and its former managing director, who is currently heading Keertana Financial Limited, her latest venture, doing MFI business shouldn’t be perceived adversely any longer in the two States.

“During demonetisation, when credit loss for the industry was 5–15 per cent, for Spandana Sphoorty, it was zero in Telangana and Andhra Pradesh,” she explains. She’s quite vocal that the credit discipline of borrowers has also significantly changed since the infamous 2010 AP crisis. “There is a realisation among borrowers in the two states that they should not get carried away by the promises of local politicians and they should not default on loans availed from MFIs. Currently, they have access only to banks and SHGs”.

Modified operation model

Even in terms of operations, there seems to be a change in approach. “Today, whether as an SFB or NBFC-MFI, the options to do direct lending to customers are increasing. As lending institutions, we would also prefer individual loans over the JLG, or joint liability group model. This way, as lenders, we can establish and ensure that there is a direct link between us and the borrower. It removes the room for possible political interference,” said a CEO of a small finance bank.

According to another CEO of a SFB, the bank is weighing the possibility of introducing microloans to cater to the MFI segment after having tested its banking operations in the states for 3–4 years. “We already have branches in AP and Telangana, and we are looking at doing MFI loans through these branches,” he said.

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