Microfinance update – Sa-Dhan in Oct 2019

Issues / Concerns in Microfinance Sector

Disturbances in Assam

Over last few weeks there have been some disturbances in the microfinance sector in some districts of Assam. There is some ongoing campaign – spreading misinformation and rumours that microfinance institutions are charging higher rates of interest and violating RBI regulations and influencing the borrowers to stop repayment of loans. Media and social media not knowing the facts well, represented the whole microfinance sector in a poor light putting the sector at risk. The affected districts are Dibrugarh, Shivsagar, Tinsukia and Jorhat.

These disturbances were on account of some local organisations which tried to influence the borrowers to stop repayment. 

At this critical junction, Sa-Dhan conducted meetings with senior representatives of MFIs/SFBs/Banks and visited the affected areas with field staff. Sa-Dhan also interacted with some borrowers and learnt that some MFIs/Banks/NBFCs are involved in coercive practices and there were also borrowers with multiple loans. Sa-Dhan took up the issue with DNBS and FIDD of RBI Regional Office, Guwahati, Assam SRLM, CGM, NABARD, Guwahati and District Commissioners and issued an advisory to member MFIs in promoting responsible lending and client protection. 

Sa-Dhan also organised a Press Conference on 30th October at Guwahati to address a larger audience. At the press conference it was clarified that the microfinance industry is governed by the stringent regulations of the RBI and there remains a cap and control on interest rate. Media gave a positive coverage about the impact of microfinance in providing livelihoods to the thousands of people, and how life has improved with the loans/products from MFIs. Sa-Dhan also participated a meeting convened by the Dibrugarh District Commissioner along with protesting local organizations, MFIs and Banks. 
Repayment issues in Dakshina Kannada district, Karnataka

There have been few sporadic repayment issues in some blocks of Dakshina Kannada district, Karnataka specially after the announcement of “Waiver of informal loans” by the ex-Chief Minister on his last day of office. Though he had later clarified that, the debt waiver is not applicable for microfinance loans, local politicians took advantage from the situation and influenced the borrowers for non-repayment of loans. Sa-Dhan took up the issue, made field visits with member MFIs in the affected areas and is in discussion with state government in association with AKMI.

Repayment issues in Kumarapalayam, Namakkal, Tamil Nadu

There have been incidents of 3 suicides in the past 3 months due to over-indebtedness. This resulted in an irregularity of payment and subsequently campaign against MFIs. This incident happened at Kumarapalayam block of Namakkal district in Tamil Nadu. Taking opportunity from the situation a lawyer turned politician continuously influenced the borrowers for non-repayment of loans.  Incidentally, the people who committed suicide were MFI/SFB clients. 

As per Credit Bureau Reports and Field Investigation, there have been few gaps in implementation of RBI’s FPC and Industry code of Conduct by few MFIs, SFBs, NBFCs and Banks. In this regard, Sa-Dhan had issued an advisory to all MFIs/SFBs/NBFCs and Banks on prudent lending practices and client protection. Sa-Dhan also developed some client education material to alert the clients. Representatives from Sa-Dhan met clients continuously while doing meetings with MFIs and District administration, LDM and SRLM to ascertain facts and make them aware of the whole issue. Sa-Dhan is closely monitoring the field situation in the concerned area.


In its Self-Regulatory Organization (SRO) role Sa-Dhan, regularly listens to the voice of the clients, and observes the latest developments in the field. In this connection, we keep organizing visits of our staff to different pockets of the country. This month we utilized our visits to sensitize the field staff on Fair Practice Code and alerted the clients on responsible borrowing. 

Sa-Dhan team visited Thane district in Maharashtra, Fatehpur district of UP, Villupuram, Cuddalore and Namakkal in Tamil Nadu and Dakshini Kannada in Karnataka.

Field Visits
Maharashtra:  Sa-Dhan team visited 3 MFIs in Thane District, interacted with four officials from the organizations.

Uttar Pradesh: Visited one MFI in Fatehpur and interacted with 30 clients and 6 branch officials.

Tamil Nadu: Visited seven MFIs in Villupuram, Cuddalore District and met 41 officials/staff from 8 branches and interacted with 70 clients.

Karnataka: Sa-Dhan Representative visited one MFI in Dakshini Kannada and met 6 field staff and interacted with clients.

Work on cost of funds calculation to help small and medium MFIs

For the last few years after demonetization and the IL&FS crisis, small and mid-size MFIs have struggled to get funds from banks. Earlier an MFI having a credit rating of B+ could get funding from the bank easily but now banks have limited their lending to the higher credit rated organizations. This has forced the MFIs to borrow from mostly NBFCs at a higher interest rate. 

Financial costs comprise 70% of an MFI’s total costs. The falling interest rate cap along with the increase in the cost of funds is squeezing margin for MFIs which includes operating cost of the organization.

By considering this issue, we analyzed data of cost of funds for different sizes of MFIs from various type of lenders to understand the interest rate spread available to them and found the situation of medium and small MFIs are grim to survive.

The RBI allows a margin cap of 12 percent for medium and small MFIs, they are not able to avail it due to high cost of funds and interest rate cap fixed based on Average Base Rate of Top 5 commercial banks*2.75 percent.

Based on outcome of the analysis, we have come up with a suitable simple formula for calculating interest rate margin cap instead Average base rate of Top 5 Commercial Banks and shared to RBI for necessary consideration.

Study on Water and Sanitation Financing- Launch of Maharashtra Water Credit Adoption Programme – II: 

Sa-Dhan started Water Credit Adoption (WCAD) programme in Maharashtra and urged the MFIs to develop Water, Sanitation and Hygiene (WASH) product in their portfolio. To accelerate the WASH financing, Sa-Dhan also developed and delivered awareness creation materials for partner MFIs.

To make the WASH financing more sustainable and robust, WCAD – II was relaunched in Maharashtra on 1st April 2019. In this regard, Sa-Dhan organized an advanced training in Mumbai to understand partners’ challenges, experiences and expectations from WCAD – II to make it successful. During the training, following topics were covered:

·         Financial constraints due to NBFC crisis and its impact on WASH financing.

·         Upgraded IEC materials which contains more pictorial, less content with striking bullet points and directly addressing the health problems in absence of toilets and clean drinking water along with solutions to overcome the issues. 

·         Advanced IEC materials also emphasized on designing of scientific toilet to make it sustainable.   

·         Partners also got training on usage of upgraded education materials effectively to sensitize marginalized people. 

Conference on “Leveraging Systems for Improved Food Security”: The 2019 Cracking the Nut conference took place on October 14-15, 2019 at the King Fahd Palace Hotel in Dakar, Senegal in West Africa.  The conference focused on balancing public concerns for food security with private, market-based initiatives. Mr P Satish, Executive Director, Sa-Dhan was invited as a Speaker of the session on “Mainstreaming the Financing of Health and Water Sanitation Products in India’s Microfinance Sector. Speaking at the session he mentioned that Sa-Dhan tries to fill the gaps in funding for health and water sanitation services, which are often not provided by mainstream banks. It plays a key role in helping MFIs design suitable credit products by factoring in the need and preferences of clients.  He continued by saying that presently 60 MFIs in India have credit products for health and water- sanitation with 99 % recovery rate. The session had case studies and short videos sharing the strategies adopted, the responses of the clients with current portfolio positions.  

Representation to Election CommissionSa-Dhan along with members from MFIs and SFBs submitted a representation to Election Commission in Tamil Nadu. They requested the EC to ensure that the ongoing activities should not be affected during the by-election in two assembly constituencies in Tamil Nadu.

Pilot for Promoting Cashless Repayments: To strengthen the digital ecosystem for underserved sections of the population. Sa-Dhan with financial support of HSBC has undertaken a project “To Develop a Digital Ecosystem for Improving Access to Finance for Unbanked”. Sa-Dhan have already completed the first two phases in Eastern and Northern region. In the third phase, Sa-Dhan is partnering with Sarvodaya Nano Finance, a Chennai based MFI, to undertake the pilot in Southern India. The pilot aims at exploring various options for cashless repayments and finding a suitable option for the client and MFIs.