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Mixed response to interest rate concerns

Mixed response to interest rate concerns
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First Published: Thu, Oct 07 2010. 11 32 PM IST
Updated: Thu, Oct 07 2010. 11 32 PM IST
Mumbai: Some of India’s microfinance institutions (MFIs) have reacted sharply to government concerns that they were charging very high rates of interest, mostly to poor borrowers, while others said some moderation was required.
In September, the finance ministry had asked public sector banks to ensure that MFIs using their funds charge “reasonable” rates of interest.
“What nationalized banks could not achieve in 40-50 years, MFIs have done in five years. The growth of microfinance cannot be stopped because people have enjoyed the benefits of it,” said S. Pattabiraman, president of ASA Grama Vidiyal, a Tamil Nadu-based MFI. “If the policymakers try to stop this industry, they will face repercussions.”
At least three public sector lenders said they have asked MFIs who borrowed from them to keep interest rates at 22-24%, though the ministry had not suggested any cap on rates, Mint reported earlier this week.
Industry executives at an industry seminar on Thursday said if rates were capped, it could lead to many small MFIs shutting shop.
“It will be very difficult for the smaller players who are just starting,” said S.V. Raja Vaidyanathan, chairman and managing director of Asirvad Microfinance Pvt. Ltd. “It takes time to build scale and adopt technology that can then lead to lowering of interest rates.”
“The unprecedented financial success experienced by MFIs might have made a lot of other stakeholders uncomfortable,” said K. Sree Kumar, chief executive of Intellectual Capital Advisory Services Pvt. Ltd (Intellecap), an investment bank that deals with microfinance. Kumar did not name any stakeholders.
According to Intellecap, the microfinance industry had lent Rs21,500 crore to around 24 million clients as on 31 March.
“Microfinance in India has the potential to become a $600 billion industry 10 years from now. It could potentially be an economy within an economy,” said Sajeev Viswanathan, managing director of Basix, a microfinance lender based out of Hyderabad. “If this direction is to be followed, the peripheral noises have to die down.”
Viswanathan and Pattabiraman said microfinance should be looked at as a commercially viable model to promote livelihood and not be treated at par with the priority sector lending activities of banks.
However, Vijay Mahajan, chairman of Basix and a microfinance industry veteran, admitted interest rates in microfinance needed to come down. “The biggest concern for MFIs is some of the players themselves,” he said. “They are over-leveraging their capital.”
Mahajan said interest rates had to come down for the sake of the industry. “We are in talks with players to bring down the interest rates and it is necessary for the very survival of the industry.”
Mahajan is also president of the Microfinance India Network, an association of MFIs that account for 85% of the microfinance business.
Many MFIs have begun lowering rates depending on where they operate and the scale achieved there.
“With sizeable scale and increased competition in the market, interest rates will come down naturally,” said Vineet Rai, chief executive of Aavishkaar India Micro Venture Capital Fund and chairman of Intellecap.
A case in point is Kolkata-based Bandhan Financial Services Pvt. Ltd, which has cut rates to 18.5% from 24%.
“We reduced rates as that gave us greater bargaining power with banks to persuade them to lower the cost of funds for us,” managing director Chandra Shekhar Ghosh said.
MFI executives also said regulators such as the Reserve Bank of India had little reason to worry about the industry as it had not yet reached critical mass in India to affect the financial system.
aveek.d@livemint.com
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First Published: Thu, Oct 07 2010. 11 32 PM IST
More Topics: Interest Rate | Loan | Funds | MFI | Microfinance |