With 2011 turning out to be a mixed bag for microfinance sector, players are likely to keep fingers crossed in the New Year as they await a new set of regulations
Hyderabad: The Rs30,000 crore microfinance industry grappling with allegations of charging usurious rates, saw their fortune dwindling in 2011 with the Reserve Bank of India (RBI) capping the interest rates for small loans, reports PTI.
The story of SKS Microfinance’s bombastic market debut in 2010 was overshadowed in 2011 as a reported management tussle in the company hogged the limelight through the year. This was followed by the exit of its founder and executive Chairman Vikram Akula.
SKS, which brought the MFI (microfinance institution) sector into limelight in 2010 with a Rs1,650 crore (around $350 million) initial public offer (IPO), had raised hopes of other players to tap the capital market.
But the series of low moments faced by the sector, including concerns of corporate governance and strong-arm tactics for loan recovery, pushed it into the dark.
Microfinance—the business of doling out small loans at high interest rates to poor people unable to access conventional lending instruments—has come under intense regulatory scrutiny following farmers suicide in Andhra Pradesh in late 2010.
The spill-over effect of the 2010 crisis was seen in 2011 when the RBI came out with regulations capping interest rates charged by MFIs from small borrowers at 26%.
In order to help the sector, RBI brought the cash-starved MFIs within the priority sector lending category. The decision allowed them to access credit from commercial banks. It also created a separate category of NBFC-MFI.
Now, the loan by banks to MFIs for on-lending to small borrowers fall under ‘priority sector’ category and fixed the loan amount for an individual borrower at Rs35,000 from an MFI.
The central bank said the loans could be disbursed to rural families with an annual income of Rs60,000 or urban and semi-urban households with income up to Rs1.20 lakh.
The RBI, however, left it to the borrowers to decide on the repayment period either weekly, fortnightly or monthly.
It has also asked the MFIs to ensure that 75% of the loan extended is utilised by the borrowers for income generation purpose.
The sector had come under criticism for multiple lending, inscrutable business models and high interest rates of over 30% reaching a peak and coercive recovery tactics used by the lenders.
Most microcredit firms lend money through self-help groups (SHG) or women’s groups and reach out to borrowers.
Interest rates charged by these MFIs usually run up to 36%, mostly due to the cost of administering millions of such loans in remote areas.
Against this backdrop, the Andhra Pradesh government had promulgated an ordinance that sought to control the interest rates charged by MFIs, as well as check their alleged use of coercive recovery tactics.
This dried up source of bank funding for the MFIs as many banks either stopped lending or trimmed their exposure to the sector.
With time, banks resumed lending only to those MFIs which did not have presence in Andhra Pradesh.
Faced with funding problems, MFIs had to resort to other fund raising measures like institutional placement. The RBI further went ahead and opened the External Commercial Borrowing (ECB) window for them to tap the markets.
The country’s only listed MFI—SKS—has already announced it would raise about Rs500 crore through the sale of shares to institutional investors.
The RBI allowed MFIs to raise ECBs up to $10 million (about Rs53 crore) during a financial year, higher than the earlier limit of $5 million, and the funds would have to be utilised for lending to small borrowers.
Analysts however feel that the move would help large MFIs but not the medium to small size MFIs.
With 2011 turning out to be a mixed bag for microfinance sector, players are likely to keep fingers crossed in the New Year as they await a new set of regulations.
The problem started for the sector started after the Andhra Pradesh government issued an ordinance to regulate the MFIs in the state.
The total loan of all MFIs to borrowers in Andhra Pradesh, which account for 25% of the total industry, fell to Rs6381 crore, from Rs10,386 crore extended before the Act.
Fresh disbursals in the state have come to a standstill.
While all MFIs put together had proposed 73,592 new loans to borrowers, the government had rejected as many as 71,309 applications citing non-compliance of MFI Act.
As many as 24 MFIs of the total 44 recognized by the RBI are operating in AP.
Despite several MLMs like Speak Asia duping numerous ‘investors’ for crores of rupees, there are no efforts by the government either to ban such ‘get-rich-quick’ schemes or to regulate it
Even as the investigating agencies are probing multi-crore ponzi schemes and scams across India, many others continue to flourish, luring people with huge returns and other incentives.
Real Planet Multitrade is a relatively new entrant in the endless list of these MLM schemes. This has left several activists doubting the role of government in regulating such schemes.
This multi level marketing (MLM) company, registered in Mumbai, promises income on buying selling certain products. Once their products are bought, it entitles one to become a distributor and further, eligible for easy income on selling these products. It, in its vision statement claims to, “To produce millions of millionaires.”
Real Planet, has basket of products – mobile chips, anti-radiation bio energy card, solar pendant and diamond pendant that are sold for Rs500 to Rs2,000. It has several package deals combing various products and sold for Rs3,000 to Rs5,000. The company also has list of health care related products such as slimming capsules, piles capsules, aloe vera capsules and rheumatic massage oil.
Real Planet has business model similar to a typical MLM company. It promises income after the initial buyer introduces or propels new members to buy these products. The level of income increases as the number of people under the initial buyer increases.
The company has two main business plans, Samprak Planet Business Plan and Re-Purchase Business Plan. In the first plan it promises Rs250, on getting two people (1:1) enrolled in the company. This binary income is unlimited. It also promises diamond star royalty and gold star royalty income, which is given on completing 300 pairs ratio. In its re-purchase plan, the company promises 5-15% on direct income. Here, if a distributor has 3 direct pairs on both sides – left hand right hand - and if the left is earning Rs1 lakh weekly, then the distributor is entitled for 10% of their weekly earning, Rs10,000 in this case.
Interestingly on all the earning plans, it has certain caps and trimming applicable. Experts point out that the originality of these products is questionable. Considering the income that the company promises, the business is bound to collapse in long run. It could be typical case, where an MLM or ponzi schemes does pay in the start and then abscond after collecting the money.
Industry experts say that there is urgent need to regulate these schemes and companies, which are technically illegal under the Prize Chits and Money Circulation Schemes (Banning) Act, 1978.
What would be the right Sensex level for the bulls to get excited?
I had suggested last...