India?s Oldest Microfinance Firm on the Verge of Closure

Wednesday, July 27, 2011

Mumbai: The controversial Andhra Pradesh microfinance law is set to claim its first victim.

Vijay Mahajan-promoted Bhartiya Samruddhi Finance Ltd (BSFL), India’s oldest microfinance institution (MFI), is collapsing under the burden of bad loans. With borrowers in Andhra Pradesh refusing to repay, bad loans are growing and threatening to wipe out its entire net worth and reserves.

“We are unlikely to survive beyond the next two to three months if we don’t get fresh funds,” Mahajan said. The microlender’s board is likely to meet later this week to decide on its fate.

As of 30 June, BSFL’s net worth was Rs128 crore, down from Rs230 crore in September last year, and this will get completely eroded because of accumulated bad loans of Rs450 crore.

The possible failure of Basix, as BSFL is popularly known, will be more than just the end of a microfinance company.

Also being snuffed out will be the dream of one of the iconic figures of the Indian microfinance movement.

One of Mahajan’s key aims has been to improve financial inclusion and, thereby, better the lot of the poorer sections of society.

The “Basix mission is to promote a large number of sustainable livelihoods, including for the rural poor and women, through the provision of financial services and technical assistance in an integrated manner”, according to a message on the group’s website. “Basix will strive to yield a competitive rate of return to its investors so as to be able to access mainstream capital and human resources on a continuous basis.”

Samit Ghosh, chairman and managing director of Ujjivan Financial Services Ltd, a leading MFI based in Karnataka, said: “It will be very sad for the whole sector. They are the pioneers in microfinance and one of the most ethical firms. They pioneered the model of structuring products for poor unlike most of the companies.”

BSFL’s loan book has shrunk from Rs1,800 crore to Rs.1,000 crore and Andhra Pradesh accounts for about Rs450 crore of this. Since repayment there has dropped to 10%, the only way to increase income would be to lend in other states where repayments are assured.

But BSFL has been unable to do so as banks are unwilling to lend it more money. Microlenders borrow from banks and lend to the poor, keeping aside a margin.

The chances of BSFL’s survival are bleak unless it gets money from banks, said Mahajan, who founded the company in 1996, eight years before SKS Microfinance Ltd, India’s lone listed microlender, was incorporated as a non-banking financial company.

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