ICICI bank has reached an agreement with the provincial government of Andhra Pradesh, India to cap interest rates at 15% and charge a diminishing interest rate on the loans disbursed through microfinance institutions (MFIs) in the Krishna district of the state. The revised interest rates will be charged retrospectively from April 2006. As per the terms of the agreement, the bank will also open an MFI desk and 10 rural centers in Krishna district to offer loans directly to customers. The bank will also explore the possibility of opening additional branches in other districts. The state government, in turn, has lifted the ban on MFIs loan collections at the agreed upon interest rates.
Earlier this year, the government of Andhra Pradesh, an Indian state where microcredit has witnessed rapid growth, had accused MFIs of usurious lending practices and unethical collection methods. Multiple suicides over MFI harassment were reported from five districts were reported with Krishna district being the most affected region. The government specifically charged the following MFIs Spandana, Asmita, Umduma Poddu Pedatha and Share Microfin of extortionate practices and subsequently, the Krishna district administration enforced temporary closure of 50 branches of these MFIs, seizure and destruction of loan records and encouraged non-payment of loans.
This might mark a significant change in ICICIs micro-lending strategy. As covered previously on MicroCapital, ICICI bank has been aggressively growing and planning future growth in this field. Their growth strategy has been based on a partnership model where MFIs act as collection agents instead of financial intermediaries. The model combined debt as mezzanine finance to the MFI. While the local knowledge and reach of the MFIs was used to reach out to the market, the loans were directly contracted directly between the bank and the borrower, thus obviating the need to setup rural branches. The Krishna district case suggests the need for amendments to this model to avoid government intervention.
The Krishna district case is significant given the players involved. ICICI bank is the second largest bank in India based on asset size. In 2005, it reported a net income of about $500 million, operated over 600 branches and has retail assets of $21.4 billion. Through about 100 rural partnerships, its portfolio of microfinance investments stood at $227 million and 1.2 million clients at the end of year 2005. The bank had recently announced plans to add 200-250 new MFIs to its partner base. Two of the MFIs involved, Share Microfin and Spandana, are the largest MFIs in India.
This is the latest in a slew of rows between governments and microfinance lenders. Prior to this, the MicroCapital blog had also reported declamations against MFIs allegedly high interest rates in Uganda and Bangladesh.
Resources
1) The Times of India: Bank tightens screws
2) Newindpress.com: Ban on loan recovery by MFIs lifted (registration required)
3) The Hindu: Crisil reaffirms MFI ratings in Krishna dist
4) The Hindu: MFI harassment: 60 suicide cases reported
5) The Economist: Rapid expansion of Indian microcredit leads to a turf war with the government(subscription required)
6) BusinessWeek: Indias banks are Big on Microfinance
7) United Nations Capital Development Fund: ICICI Banks the Poor in India:
Demonstrates That Serving Low-Income Segments Is Profitable
8) MicroCapital Blog: ICICI Bank Expands Retail Microfinance Business In India
9) MicroCapital Blog: Ugandan President Attacks High Interest Rates of Microfinance Institutions
10) MicroCapital Blog: Usurious Rates in Microcredit Abound A Thanksgiving Message on Righteous Investing
11) American Enterprise Institute for Public Policy Research: Building on success The Next Challenges for Microfinance
12) ICICI Bank: Financials
13) Financial Express: ICICI Bank targets 250 MFIs
14) Spandana: MixMarket Profile / CGAP Case Study
15) Share Microfin: MixMarket Profile
16) Asmita: MixMarket Profile
