| Log in

RBI Panel Moots Interest Caps, Creation of NBFC MFIs

20 January, 2011

The Indian microfinance industry, a favourite with the investor community but currently facing major operational and regulatory issues in sector hotspot Andhra Pradesh, is in for some sweeping changes.

The Malegam committee, appointed by the Reserve Bank, has come out with its recommendations that seeks to cap the interest rate and the gross margin (over fund cost) chargeable by microfinance institutions, create a separate group of microfinance lenders who will not be bound by local laws (such as those stringent ones set by the state of Andhra Pradesh, the most important market for microfinance industry) besides others key measures to be implemented from April 1.

SKS Microfinance, the country’s largest (and the first to be listed on the stock exchange) microfinance lender saw immense investors interest with its scrip shooting up 7% at mid day on Thursday. The stock has climbed 27% over the last one month, a period when the broader market has corrected sharply.

The positive sentiment is arguably linked to the creation of formal rules of the game. In the absence of the same, the sector was shrouded by uncertainty. The norms will also make sure firms operations in the key stake of Andhra Pradesh may not suffer for long.

Perhaps the most important suggestion is for the creation of a new group of NBFC-MFIs that can lend to low-income borrowers (with annual family income of less than Rs 50,000 or $1,100), and will be out of the ambit of Money-Lending Acts. These can lend a maximum of Rs 25,000 to a single borrower.

All existing pure MFIs will try and meet the criteria set for classifying themselves as NBFC-MFIs. Those who do not would not be allowed to lend more than 10% of their assets in the microfinance space.

NBFC-MFIs will not be bound by draconian laws such as those imposed by Andhra Pradesh after news of borrowers committing suicides for not being able to pay back and being coerced to meet their liabilities. This has had serious impact on fortune of MFIs in the country and had seen stock price of SKS Microfinance skip to the lowest level yet on December 21, almost down 60% compared to the high few months ago.

The committee has also suggested that 10% as the maximum spread over the cost of funds so if the cost of fund is just 10%, the maximum rate at which a microfinance firm can lend cannot be more than 20%. While some see the cap of 24% on the lending rate to consumers as making it tight to make money for microfinance firms, others say it leaves enough room to operate with a spread of 3-4% over the cost of fund and operations.

The margin cap of 10% above cost of funds and rate ceiling of 24% will provide borrowers opportunity for greater success, said Dr Tara Thiagarajan, chairperson, Madura Microfinance Ltd. “At Madura Microfinance we have always strived to maintain low operating costs that have enabled us to lend profitably between 18-21% and still provide training and other benefits for our members. As an industry, if we are more responsible, there is absolute scope for lenders and borrowers to strike a mutually beneficial balance,” according to Dr Thiagarajan.

Meanwhile, the committee has also suggested that MFIs ensure that a borrower is a member of just one self-help/joint liability group and more than two MFIs lend to the same borrower.

The new proposed norms comes straight after the central bank relaxed norms for bank lending to MFIs. It allowed banks to restructure their loans to microfinance institutions without tagging it as non performing assets. This will ensure fund support for the MFIs who were facing a crunch. The Malegam committee has also recommended to continue with bank lending to NBFC-MFIs to be categorised as priority sector lending.


Leave Your Comment
Microfinance institutions set to see further consolidation

Microfinance institutions set to see further consolidation

Bruhadeeswaran R 5 years ago
The microfinance institutions (MFI) sector, subjected to a blizzard of critical...
Higher Provisioning Dents SKS Profit Numbers

Higher Provisioning Dents SKS Profit Numbers

Pallavi S 7 years ago
India’s largest microfinance lender SKS Microfinance’s net profit shrunk by...
Post-Fall, SKS Whips Off Gold Loan Carrot; Stock Hits Upper Circuit

Post-Fall, SKS Whips Off Gold Loan Carrot; Stock Hits Upper Circuit

Pallavi S 7 years ago
Microfinance lender SKS Microfinance’s share is in hot demand right now. The...
No Comments

RBI Panel Moots Interest Caps, Creation of NBFC MFIs

Powered by WordPress.com VIP