Mumbai: Public sector banks have raised the effective interest rate at which they lend money to microfinance institutions (MFIs) to between 15% and 18%, citing higher risks in the sector.
MFIs are companies that issue small loans to poor borrowers. They source around 80% of their funds from banks.
According to microfinance industry executives and some bankers, the cost of loans has gone up following a rise in the premium banks charge in excess of their minimum lending rate. Besides, banks are also charging a processing fee and ask for cash collateral as security. This means banks do not disburse the entire loan amount even though they charge interest on it.
Punjab National Bank (PNB), Corporation Bank, Indian Bank and Syndicate Bank, among others, have loaned money at an effective rate of 15-18% to some large microlenders, according to the executives.
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Public sector banks have raised effective interest rates for lending to MFIs, due to the higher risks in the sector. Mint’s Dinesh Unnikrishnan discusses the implications.
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Till at least six months back, public sector banks used to lend money at 12-14% to microlending firms. The rates charged by private lenders have all along been higher than their counterparts in the public sector.
Banks generally lend to MFIs to meet their so-called priority sector loan targets. Under current norms, they are required to allot 40% of their loans to companies, individuals, and bodies in agriculture, exports or other areas that are considered either of strategic economic importance to the country or simply needy.
“Banks such as Indian Bank and Syndicate Bank have lent at an effective rate of as high as 18% to some MFIs in recent months. This hurts MFIs, who have been already hit by a crisis and stringent regulations,” said Vishal Mehta, co-founder of Lok Capital, which has invested $25 million (around Rs 125 crore today) in eight MFIs.
According to Mehta, a director on the boards of four MFIs, there is now virtually no difference between the interest rate charged by a bank and that charged by non-banking finance companies, which typically charge them 17-20%.
The sector was hit by a crisis in late 2010, when Andhra Pradesh, which accounts for at least one-fourth of the microfinance business, put a strict law governing MFIs in place, following a spate of suicides allegedly caused by coercive loan recovery practices. The repayment rate subsequently plunged to 5-10%.
Commercial banks have since then been tightening the flow of money to MFIs, fearing that they will not be able to pay back loans.
According to the latest Reserve Bank of India (RBI) data, bank lending to micro-credit, comprising loans to self-help groups and MFIs, fell to Rs 21,000 crore in December 2011 from Rs 28,820 crore in the previous year.
Shubhankar Sengupta, managing director of Arohan Financial Services Ltd, confirmed that there have been cases of state-run banks lending at high rates to MFIs. “The minimum effective lending rate at which some banks lend to MFIs of late is at least 15.5%. In some cases, it goes up to 18%,” he said.
Sengupta’s firm is borrowing at such rates. In December, Arohan had a loan book of Rs 58 crore.
In an emailed response, PNB said: “The effective rate of interest of PNB charged to MFIs depends on the card rate and is linked with the base rate of our bank. The interest rates are linked with the credit rating of the MFIs and as of now varies from 12.75% to 15.25%.”
It also said the rate of interest for MFIs has not been changed.
Indian Bank chairman and managing director T.M. Bhasin said: “The average cost of loans to our MFI customers is around 15%. Depending upon the individual situations of the company, the ultimate cost to the borrower can go up to 17% in some cases.”
The other banks mentioned in this story didn’t respond to queries.
A general manager, who heads the credit division at a state-owned bank, said banks take a call on their lending rates to companies depending on the credit rating and risk perception.
According to this official, most of the lenders are still giving loans at 13-14% to MFIs outside Andhra Pradesh, but microfinance industry executives deny this.
A. Raja Vaidynathan, managing director and chief executive of Ashirvad Microfinance, said his organization paid an effective rate of 15% to secure a loan from one of the state-run banks in December.
According to the general manager cited above, most banks are still reluctant to lend to MFIs despite RBI regulations because they believe state governments can still interfere in the operations of microlenders in the absence of national rules. A national law for microfinance is yet to be ratified by Parliament.
In the aftermath of the crisis, banks completely stopped lending to MFIs based in Andhra Pradesh. Lending to companies outside Andhra Pradesh has been a fraction of what it was earlier.
SKS Microfinance Ltd, India’s lone listed MFI, recently received a Rs 100 crore loan from the Small Industries Development Bank of India after a gap of 15 months.
At least five leading MFIs—Trident Microfin Pvt. Ltd, Share Microfin Ltd, Asmitha Microfin Ltd, Spandana Sphoorty Financial Ltd and Future Financial Services Ltd—got their loans restructured by banks in June 2011, as their business was severely hit.
Early last year, RBI issued regulations to govern MFIs. The central bank capped the interest rate MFIs can charge at 26%, the processing charge at 1% and margins at 12% as preconditions to qualify for loans from banks through the priority sector channel.
With banks raising the cost of money and the cap on what MFIs can charge unchanged, most are finding it difficult to achieve a profitable business model. MFIs can charge higher rates if the money is not part of priority sector borrowing.
dinesh.n@livemint.com