Spandana Should Vacate Andhra Pradesh for Survival

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Spandana Should Vacate Andhra Pradesh for Survival

Spandana Should Vacate Andhra Pradesh for Survival
Spandana Should Vacate Andhra Pradesh for Survival | Source

Spandana Should Vacate Andhra Pradesh for Survival


Spandana opting for merger

Microfinance institutions are facing the heat. These institutions got a bad name particularly in the State Andhra Pradesh for fleecing the poor people and collecting usurious interest through forcible methods. This prompted Andhra Pradesh State Government and the Reserve Bank of India to enact legislations to regularise microfinance institutions. SKF Microfinance is the biggest institution in the industry and is now restructuring and reorganizing to survive in the changed situation. Other players are also following suit. Spandana Spoorty Financials is planning to merge itself with Share Micro and Asmita. It has sought the permission of RBI for the merger.

Merger will not solve problems for Spandana

Padmaja Reddy is the Managing Director of Spandana Spoorty Financials. She feels that the merger will provide a win-win situation for the three companies that are merging into a single entity in the context of challenging situation that is prevailing in the microfinance industry. But her assessment is totally wrong. Unless the microfinance institutions change their attitude drastically, they will invite wrath from the people and the regulators whether they function as a single unit or as a merged entity.

Yeomen service but third rate methods spoil the show

Microfinance institutions provide small amounts as loans to the poor and the needy in time. This is really an appreciable act. Even the government or the government-owned banks do not provide timely assistance to the poor people. But microfinance institutions work in the midst of the poor people and cater to their needs. But the institutions charge a usurious rate of interest. They squeeze out blood from the poor people and prosper. They force the poor people to pay exorbitant interests. If the people are unable to pay, the institutions deploy ‘third parties’ (read rowdies) to threaten and collect the money that is due to them by hook or by crook.

Poor people cannot repay

Poor people cannot protest against these methods as mostly the local politicians and the police officers are also a part of this fleecing act. Therefore they silently bear the brunt and pay huge money to these institutions. But there is another truth also to be taken into consideration here. Without these harsh methods, the microfinance institutions cannot collect back their money from the poor people. Even if they lower their rates of interest, the poor people will continue to default. Most of the poor people are addicted to alcohol and other vices in life. They spend whatever little they earn and starve their own families. How can these poor people repay the interest and the principal they borrowed from the microfinance institutions?

Interest rate is not the issue

Therefore, interest rate is not the real issue here. The microfinance institutions have survived so far by resorting to harsh methods to collect the amounts due from the poor people. Now that the State and Central governments along with RBI have enacted strict legislations to curb this practice, the microfinance institutions feel like fish out of water for survival. Under the circumstances, mergers are not a real solution. What then is the solution for them in these challenging times?

Microfinance institutions should follow the five principles

First of all, microfinance institutions should lend only to those people who have a good track record of repayment. Secondly, they can lend against jewellery. Even poor people have jewels. A loan granted against jewels pledged will not be defaulted and even if it is defaulted, the institution will have security to fall back upon. Thirdly, they can lend by insisting on guarantee from a person who already has a good track record of repayment. Fourthly, the microfinance institutions should lend directly to women wherever possible as women’s default rate is much less than that of men’s. Wherever possible, they should lend to Self Help Groups of women for viable activities. Fifthly, the microfinance institutions should vacate the troublesome state of Andhra Pradesh lock, stock and barrel and move to other states where business atmosphere is normal and conducive. If the microfinance institutions follow these principles, they can survive and prosper even in this tough time. The five principles enshrined above may be called as Panchsheel for the microfinance industry.

Vacate Andhra Pradesh immediately

Spandana is the second largest microfinance institution in India. It has concluded a corporate debt restructuring deal with 34 banks in India amounting to Rs.2300 crore in the month of September. The deal has provided Spandana seven year period to repay the bank loans. There is also a moratorium period of one year for interest payment to enable Spandana to spread to other states and to vacate the troubled Andhra Pradesh. Every microfinance institution finds that repayment in States other than Andhra Pradesh is normal. Spandana also wants to expand its tractor business from the present Rs.90 crore to over Rs.150 crore. Spandana feels that business confidence is high in states like Karnataka, Chhattisgarh and Madhya Pradesh.

Andhra Pradesh borrowers have totally stopped repayment

Even in the troubled state of Andhra Pradesh where the borrowers have totally stopped repayment of the loans availed by them due to the political support they have, Spandana gets good repayment for the tractor loans it advanced to farmers as these loans have the mortgage of land and tractor. Spandana has around 13000 employees on its payrolls. Nearly half of the employees are based in Andhra Pradesh. As Spandana winds up its operations and moves to other States, employee casualty is bound to occur and the Andhra Pradesh based employees may be losing their jobs overnight.

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