Mumbai: India’s microfinance industry is showing signs of overheating in a possible reminder of the crisis that hit micro lenders in Andhra Pradesh in 2010.

According to Crif High Mark Credit Information Services, a credit bureau, around 1.26 million microfinance borrowers had received top-up loans over and above their existing loan amounts as of December end. According to Crif High Mark, top-up loans are defined as those with a ticket size of less than Rs10,000 and where customers have at least two active loans. Typically, such a loan is taken out for up to nine months.

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Worryingly, 70% of these borrowers have at least three loans running at the same time. While Reserve Bank of India guidelines mandate that not more than two microfinance Institutions (MFIs) can give loan to the same borrower simultaneously, the guidelines are silent about borrowing from other lenders. This means many people take out loans from multiple sources.

“Average exposure for these customers (those who had top-ups) is Rs45,400 which is more than the double of national average figure, Rs22,000. Also, 17% of these customers with top-up loans are servicing five loans at a time," said Kalpana Pandey, managing director and chief executive officer, Crif High Mark.

Several years ago, many small borrowers in Andhra Pradesh were provided loans from multiple, and many borrowers used one loan to repay the other, leading to over-indebtedness over time. There were reports of coercive tactics to recover money, forcing the government to issue an ordinance in 2010 to correct the irregularities.

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While the number of borrowers receiving top-up loans pales in comparison to the 42 million MFI borrowers in India, the total loans outstanding to these borrowers stood significantly higher at Rs5,900 crore as of December end, with top-up loans accounting for Rs369 crore of this amount. The total loans outstanding to microfinance borrowers stood at Rs93,800 crore, of which microfinance companies and banks held 62% and 28% respectively, December-end data showed.

“We devised life cycle products for our customer for their various requirements throughout the year, to avoid them to go to money lenders. We don’t look at only one loan for customer since cash flow for these borrowers dips so many times in a financial year," said Udaya Kumar, managing director and chief executive of Grameen Koota Financial Services Pvt. Ltd, a Karnataka-based micro lender. “Such top-up cases are more frequent in Karnataka and Tamil Nadu because they are more matured markets," Kumar added.

Crif data reveals that Tamil Nadu and Karnataka constitute almost half the top-up cases. It also shows that gross loan portfolio distribution and customer base in these two states accounted for roughly a fourth of the total share at the end of the December quarter.

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Sa-Dhan, a self-regulatory organization for the microfinance industry, believes that these top-up borrowers are showing signs of risk. “When a borrower has a burden of loan, issue is that of servicing it. It is a matter of concern if borrower has taken more than two loans since there might be a possibility that top-up amount is being used to service left-over instalments," said P. Satish, executive director of Sa-Dhan.

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