Mudra Bank is not a game changer, says report, based on experience of SKS Microfinance
With 10% cap on spread, large NBFCs and MFIs like SKS will not see any improvement in margins or profitability and a cheaper loan from Mudra Bank may not make it into a game changer, says Religare
SKS Microfinance Ltd (SKSM) on Wednesday said the Micro Units Development & Refinance Agency (MUDRA) has sanctioned a refinance line of Rs100 crore to the lender at an interest rate of 10%. However, since there is a 10% cap on spread for all large non-banking financial companies (NBFCs) and micro-finance institutions (MFIs), lower funding cost does not improve margins or profitability, says Religare Capital Markets Ltd in a report.
At present, the average funding cost of SKSM is about 11.9%, while incremental funding cost is around 11.2%.
Religare, in its previous report has said that Mudra Bank's micro unit refinance scheme has turned out to be a non-starter due to the strict caps on onward lending spreads. As against a current corpus of Rs5,000 crore, Mudra Bank has disbursed just Rs150 crore to banks and MFIs since April 2015.
The RBI has fixed the rates at which Mudra Bank can lend funds under its refinance scheme for unsecured micro loans. For banks, this will be at cost of funds (COF) + 0.75%, for co-operative or regional rural banks at COF + 3.5%, and NBFCs or MFIs at COF + 4 to 6%. The central bank has also capped the spreads that banks, NBFCs and MFIs (Fig2) can charge borrowers if they avail of refinancing from Mudra. While banks have to lend at base rates, NBFCs and MFIs cannot earn spreads over 6% and 10% respectively, implying lending rates of 16-18% for NBFCs and 20-22% for MFIs. This renders Mudra refinancing unattractive due to the high operating and credit costs involved in unsecured microfinance lending.
This also means, small finance banks (SFB) can avail loans from MUDRA at much lower rate than MFIs. "Mudra is lending at 6.75% to universal banks. However, borrowing rate for SFB is not decided, in our view it will be lower than MFIs and marginally higher than rates charged to universal bank i.e. between 6.75-10%. One of the main objectives for Mudra is to enable banks to fund low-income people at much reduced cost. Small finance banks will be better off as compared to MFIs, if they get funding at a cheaper cost by about 100-200bps," Religare said in its latest report.
Religare feels MFIs who got the small finance bank license will see rating upgrades and in turn reduced cost. "We believe SFBs will see rating upgrades by at least 2-3 notches which will result in lower cost of funds. In our view, their ability to tap wholesale market has already improved (recently few MFIs who got the license have done CP issuance at 10.5%). Post conversion into a bank, SFBs will have similar or lower cost of funds compared to MFIs resulting in immense competition," it concluded.
SKS Microfinance closed Wednesday 6.4% up at Rs425.70 on the BSE, while the 30-share benchmark ended the day marginally down at 27,039.