MUMBAI: The new legislation that Karnataka-the fourth largest market for microlenders with almost Rs 41,000 crore in outstanding - will spawn more disruptions in a market that has been reeling for almost a year due to the problems in the largest two markets - Bihar and UP - as it will impact customer discipline leading to an increase in delinquencies in near term.
According to an analysis by India Ratings, with Rs 62,027 crore of outstanding loans, Bihar is the largest market for microfinance institutions but is also the fountainhead of bad loans for almost a year now.
Bihar is followed by Tamil Nadu both in assets and bad assets now with Rs 54,835 crore of outstanding loans, followed by UP with Rs 43,816 crore of outstanding dues and Karnataka comes fourth Rs 40,905 of loan book, of which Rs 24,810 crore of dues are with the top MFIs such Credit Access Grameen Bank, the listed Muthoot Fincorp subsidiary MFI and others.
While so far, Karnataka has not been in the top non-performing markets, the state government’s Micro Loan and Small Loan (Prevention of Coercive Action) Ordinance that into force from February 12, 2025 will have scupper the credit culture and lead the industry into a chaos, the agency said, adding this is despite the fact that the Ordinance excludes banks, non-banks and MFIs but applicable to un-registered/unlicensed microlenders only.
Karnataka has the fourth-largest microfinance market and some large MFIs have a sizeable portion of their portfolio in the state. Also, the political events unfolding in the state can have a spillover effect in the nearby regions.
Top five large MFIs operate in the state, comprising nearly 35% of the gross loan portfolio as of December 2024. The share of Karnataka in the overall loan portfolio for such players ranges between 9% and 33%, indicating some level of geographical concentration risk. With the ongoing political issues in the state, the collection efficiency levels in the state has already dipped by 1 to 4 per cent between December and January.
“Ongoing developments in Karnataka can exacerbate the already brewing troubles for MFIs and delay the recovery further, given the contribution of the state to the industry and a relative dip already seen in the collection efficiency,” according to Karan Gupta, head of financial institutions at the agency said.
The Ordinance was issued after news reports said several families in the state are being allegedly abused by microfinance companies over the past few months and MFI collection agents harassing borrowers, leading some to the arrest of some collection agents.
The key points covered under the Ordinance include mandatory registration of unregulated micro-lenders with designated district authorities within a specified time, prohibition of coercive recovery practices, transparency in loan pricing, establishment of an ombudsman for mediation of disputes and debt relief in case of loans disbursed prior to implementation of the Ordinance.
Coercive recovery practices attracts up to Rs 5 lakh fine or a up to 10 year jail term. The Ordinance also offers relief on the loans taken from unregistered/unlicensed MFIs, prior to the ordinance.