MFIs look beyond banks, explore other ways to meet credit need

New Delhi: Faced with heightened regulatory scrutiny, many microfinance institutions (MFIs) in the country are now exploring different ways, including the debt route, to meet funding requirements, reports PTI.

A number of micro lenders, especially small sized, are facing credit crisis as state-run as well as some private sector banks are not lending funds to them in the wake tighter regulatory scrutiny, industry experts told PTI.

"MFIs need diversified routes to get credit and have been exploring various funding sources. In the backdrop of recent controversies in the sector, MFIs are facing some tighter norms and have been looking all the other means of means, including equity and debt," Microfinance Institutions Network (MFIN) chief executive Alok Prasad said.

MFIN is a self- regulatory group of NBFC MFIs working to promote microfinance sector in the country.

Market sources, who did not want to be identified, said many banks have almost stopped giving credit to MFIs (but not across the country) and consequently they are now forced to look for other ways of funding, like selling non-convertible debentures.

The country's largest MFI SKS Microfinance, however, said it does not face any credit problem. "We are fine. We don't have any issue," a SKS spokesperson said.

According to media reports, the Hyderabad-based two MFIs - Share Microfin and Spandana Spoorthy - have put on hold their plans to raise funds via initial public offerings (IPOs) due to recent upheavals in the sector.

However, worried over recent upheavals in the MFI sector on account of high interest rates small lenders charge and their strong-arm loan recovery tactics, many players have put on hold their plans to raise funds through the capital market route and now are exploring other avenues.

After a Rs1,600 crore successful IPO by the Vikram Akula-founded SKS Microfinance, some leading microfinance firms were mulling to hit the capital market.

The microfinance sector in the country has faced heightened regulatory scrutiny in recent weeks. The ministry of finance has recently advised public sector banks to monitor lending rates of MFIs.

In addition, the government of Andhra Pradesh has passed an ordinance that significantly enhances regulatory control on MFIs in the state, reflecting the concerns regarding what the provincial government perceives are high interest rates being charged by the MFIs, and the coercive means of recovery they adopt.

Additionally, the Reserve Bank of India (RBI) has initiated a review of the priority sector status that is currently being accorded to bank lending to the MFI sector. The RBI has also announced formation of a committee to assess MFI functioning.

MFI sector's dependence on Andhra Pradesh is high, since the state's share of loans outstanding represents nearly 35% of the sector's total portfolio.

It is possible that any potential change in regulations may impact the sector's growth, access to funding, asset quality, and operational costs over the near-to-medium-term.

According to rating agency Crisil, MFIs are the powerful mean to extend formal credit services to India's under-served rural poor. MFIs help raise the income levels and standards of living of the poor, thus, contributing to financial inclusion.



Rajan Alexander

6 years ago

bWhen we started out in development a couple of decades ago, we instinctively targeted to reduce the influence of money lenders, if not eliminate them completely. Why? They were the traditional oppressors and exploiters in society. Micro-savings and revolving loans worked very well until the most fancied MFIs burst into the scene. MFIs operate under these two beliefs: “Having access to expensive credit is better than no credit” and “the observed rate is where demand equals supply”. These two beliefs were ironically the very same fulcrum the traditional money-lenders operate with.

The result is an “Animal Farm” situation where we are now not able to distinguish between “pigs” and “humans” and vice versa. In fact, money-lenders have got a make-over by packaging themselves as MFIs. A good example is Mohd Yunis of Grameen Bank comes from a traditional money-lending caste. And of course, he got the Nobel Prize and so did Al Gore & Pachauri. Thank God the Nobel Committee did not confer Gandhiji the same distinction, by clubbing him with these scamsters.

The IPO of SKS, one of the largest MFIs in India, saw it over-subscribed by 15 times; their Ten-Rupee share was priced at a premium of Rs 985 - showing how much the market had confidence on their profitability while “banking with the poor”. The promotors of SKS became multi-billionaires over-night! MFIs argue that they have to charge high rates to maintain profitability. Profitability, which even private banks couldn’t match! Profitability that permits SKS to pay Rs 1 crore as bonus to their just fired CEO!

And how do they attain profitability?

A month ago, SKS in the state of Andhra Pradesh was accused of a series of farmer suicides that prompted the state government to introduce new restrictions on the microfinance industry by seeking to cap lending rates and end coercive means of recovery. Last week alone, Andhra Pradesh police arrested three loan agents of SKS Microfinance and Spandana Sphoorty Financial Ltd. after borrowers complain that they were illegally pressured by the agents to repay their small loans around $1,300. For those of us in the field, this conduct of MFIs is no surprise.

MFI research puts irinterest rates between 25-30%. But my experience (and this is my 30 years in the field) put this figure several times higher. Even if we take this range which they described as the lowest in the world, the only benefit of such loans is for working capital and not capital formation. What is the kind of subsidies Rata Tata gets to produce a one lakh car? We all are aware that a mere 0.5% rise in banking rates can crash the stock market, so sensitive is their profitability linked to interest rates. Compare this with those the poor is asked to bear.

AP’s share of outstanding microfinance loans represents nearly 40% of the sector’s total portfolio, according to CRISIL. Now if MFI is all about access to the poor, we can ask the question, why the clamour to be concentrated in a state which belong to top-five in development in the country? We would have thought they would have gone to the five lying at the bottom rung of the country. But no, they avoid it like plague. It is easy to see they do this on repayment potential of states. The interests MFIs pursue are interests of self sustenance and their own growth. The poor is hardly in the radar except for rhetoric. In fact, it is on the blood and coercion of the poor, MFIs like SKS can giveaway Rs 1 crore as bonus to the CEO.

The sooner MFIs are seen as profit enterprises, the better. The longer they pretend they are pro-poor, the longer they discredit the NGO sector that gave birth to a Frankenstein. Rather than regulate MFIs, I for one will welcome the day of their demise.

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