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What The Budget Spells For Troubled Microfinance Sector

01 March, 2011

Capital inflows into Indian MFIs dropped 92%–to Rs. 49.5 crore ($11 mn) via 2 deals in 4Q of calendar 2010 from Rs. 600 crore ($134 mn) via 32 deals in 4Q of calendar 2009.  This dramatic decline is largely due to investor paralysis in the wake of the Andhra Pradesh (A.P.) microfinance crisis.  The Union Budget presented to Parliament yesterday should restore investor confidence and facilitate public sector investment into MFIs through earmarked funding for a range of target microfinance client groups. In addition, the Budget should benefit current and potential MFI clients and businesses that increase their financial access. 

 

The planned ~Rs. 100 crore ($22 mn) India Microfinance Equity Fund with SIDBI for funding smaller MFIs and the government’s heightened focus on crafting consumer protection regulation should signal lower microfinance sector risk to investors for three reasons.  First, the India Microfinance Equity Fund reflects the federal government’s explicit commitment to MFIs.  Second, appropriate regulation mitigates the risk of populist backlash insufficient consumer protection and unchecked growth.  Both this federal government commitment and robust consumer protection should reduce investor skittishness.  Third, equity infusions increase an institution’s liquidity cushion.  Domestic equity is helpful to small Indian MFIs in any environment, given high NBFC minimum capitalization norms for majority foreign investment: Rs. 23 crore ($5 mn) for 51-75% FDI and Rs. 230 crore ($50 mn) for 75%+ FDI. 

 

Nowadays, after the Malegam Committee recommended capping interest rates at 24%, small MFIs, which are generally less profitable than large MFIs, require greater liquidity as they adjust to the new constraints.  While the fund with SIDBI should give investors some comfort, Rs. 100 crore represents only 0.33% of the current Rs. 30,000 crore ($6.7 bn) of outstanding Indian microloans and a mere 0.1% of the Rs. 100,000 crore ($22 bn) demand.  Achieving broader financial inclusion will require significantly more capital. 

 

By allocating funds to traditionally underserved groups, such as minority communities and farmers, and mandating delivery of banking services to all 73,000 habitations with 2,000+ populations, the budget is likely to direct capital to MFIs that serve those groups.  For example, public sector banks will now be required under priority lending to allocate 15% of outstanding loans to minority communities, many of which include significant economically weaker sections, up from 13.6% at present.  The Union Budget also raised credit for farmers by 27% to Rs. 475,000 crore ($106 bn) in 2011-2012 vs. Rs. 375,000 crore ($83 bn) in 2010-2011. 

 

In addition to bolstering food supply, this should increase capital flows to low-income farmers and the MFIs that serve them.  Third, the aforementioned goal of providing banking facilities to all 73,000 habitations with 2,000+ populations in 2011-2012 should benefit bank correspondents, MFIs, and other channel partners with last-mile reach.  Such partnerships could increase employment and livelihood promotion activities in small habitations. 

 

More broadly, the Union Budget creates an enabling environment for the economically active poor and the businesses focused on them.  To illustrate, creating a Rs. 500 crore ($111 mn) Women’s Self Help Group (SHG)’s Development Fund should expand the reach of the 4.6 mn SHGs in India—25% of which are in A.P.—and help reduce their interest rates.  That being said, a variety of operational issues have plagued SHGs, limiting their impact.  In addition, providing banking facilities to 73,000 habitations encourages technology companies to develop the expertise to enable large financial institutions to process, disburse, and collect small loans cost-effectively. 

 

In summary, the Union Budget is a vote of confidence for MFIs and their low-income clients alike.  Indian state government officials, please take note of the pro-poor orientation of the center!  

 

(Bhakti Mirchandani is a Vice President and Richa Sethia is an associate with Unitus Capital.)

 


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1 Comment
Krishnamraj Goud . 6 years ago

It is good news to MFI Industry, that finally govt accepted the importance and need of microfinance. For their self growths political and media opposed the MFIs but the poor people are crying with out Micro loans. Expecting crisis will close of MFIs as well poor woman in india.:-) – Krishnamraj- SKS Microfinance

What The Budget Spells For Troubled Microfinance Sector

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