Group says high rates due to tight norms

Group says high rates due to tight norms
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First Published: Thu, Apr 22 2010. 11 12 PM IST
Updated: Thu, Apr 22 2010. 11 12 PM IST
Mumbai: After the Reserve Bank of India (RBI) criticized microfinance institutions (MFIs) for lending at excessive rates of interest, the lenders have said they are compelled to do so because of the regulator’s stringent norms.
RBI governor D. Subbarao had lauded MFIs in December for reaching out to people with no access to banks, but was criticial of their high interest rates.
The Microfinance Institution Network (MFIN), an industry lobby group, said on Thursday the sector has a high cost structure, which forces it to maintain high interest rates.
MFIs get loans from banks at 12-14%. They have to maintain a capital adequacy of at least 15%, which translates into about 5% in interest cost, according to MFIN.
The operating expenses of efficient MFIs are more than 6%, and the default rate is an average 2%. As a result, MFIs’ lending cost is 24% on an average, but can go up to 30%, MFIN said.
“Allow us to be a business correspondent and we will be able to offer loans at 18-21%,” said Vijay Mahajan, chairman of MFIN and the microfinance firm Basix.
Business correspondents work on behalf of banks to reach out to remote populations. They disburse loans, accept deposits and offer services like insurance, which improves their access to cheap capital.
MFIs, on the other hand, have to rely on banks, development finance agencies such as the Small Industries Development Bank of India (Sidbi) or private equity funds as they do not have access to the savings of their customers, MFIN said.
Manpower requiements are also lesser for business correspondents compared with MFIs, which currently employ nearly 250,000 people nationwide.
Mahajan also said MFIs should be treated differently from non-banking finance companies, whose sources of funds are restricted.
Rajesh Mokashi, deputy managing director at credit assessor Care Ratings Ltd, did not agree that changing the nature of categorization of MFIs would reduce the interest rates they charge.
“Cost of fund is a function of risk in business and the efficiency of the firm,” said Mokashi. “We have seen a lot of microfinance companies starting with a poor rating but subsequently graduating to good ratings as they improve their efficiencies.”
The higher the rating of a firm, he said, the lower the rate of interest banks charge of them.
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First Published: Thu, Apr 22 2010. 11 12 PM IST