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Sa-Dhan to toe govt line, seeks to cap MFI lending rate at 24%

Sa-Dhan to toe govt line, seeks to cap MFI lending rate at 24%
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First Published: Wed, Dec 01 2010. 11 40 PM IST
Updated: Wed, Dec 01 2010. 11 40 PM IST
Kplkata: Aconsensus is emerging among India’s microfinance lenders on capping the rate they charge on small loans advanced to poor borrowers at 24%, in line with a recent recommendation by the finance ministry.
Microfinance Institutions Network (MFIN)—a lobby representing 44 top Indian microfinance institutions (MFIs)—decided on Friday that its members would immediately cap the lending rate at 30%, and bring it down to 24% within 18 months.
Sa-Dhan—a larger industry body comprising at least 264 MFIs—said its members, too, would pare the lending rate to 24%, but isn’t immediately committing to an 18-month timeframe, unlike MFIN. It says its members have agreed to reduce the lending rate to 24% “as early as possible”.
Indian MFIs are facing a crisis after Andhra Pradesh tightened regulations governing the sector, which has faced criticism for allegedly charging excessive interest rates and using coercive methods to recover loans.
Indian microfinance lenders charge 18-41% interest on loans given to the poor, and most of the profitable ones have, for years, maintained a return on assets of at least 2% going up to 9%, against the average return on assets for Indian public sector banks of 0.6%, a study showed.
Though Sa-Dhan appreciates it is going to be difficult for smaller MFIs to cope with the cap, it has told its members that they would “eventually have to bring down lending rate to 24%”, according to executive director Mathew Titus. “For firms that have less than 50,000 customers and less than Rs40 crore in outstanding loans, it’s going to very difficult,” he said.
“There is no option… even if some of the smaller MFIs do not survive the cap,” said Kuldip Maity, managing director and chief executive officer of Village Financial Services Pvt. Ltd, one of the top 20 lenders, which is part of both MFIN and Sa-Dhan.
Though difficult, “it’s a challenge worth taking”, said Alok Prasad, chief executive officer of MFIN.
Sa-Dhan is holding meetings across India to educate its members about the need to reduce the rate. It has also appointed a consulting firm to review business practices of all its members and to make sure they are following the best practices that it has recommended in a code of conduct prepared in August.
The smaller MFIs say they face an uncertain future.
It is almost impossible to immediately reduce fixed costs such as employee salary, said Biswajit Das, general secretary of Belghoria Janakalyan Samity, a society which lends money to the poor in the suburbs of Kolkata. “The only way of coping is by quickly expanding our loan book, which, too, is immediately impossible because banks have stopped lending to us,” he said.
The current situation could force a lot of MFIs to turn to the urban poor because the average loan size is bigger in cities. This could help reduce operating costs, but would “defeat the key purpose of the sector—make loans available to the rural poor”, said Ganesh Chandra Modak, general secretary of Gram Vikas Kendra, a society which lends to the poor in West Bengal’s villages.
While agreeing to reduce the lending rate to 24% within 18 months, MFIN wants banks to cap the spread, or the difference between return on loans and the cost of funds, on loans given to MFIs at 4 percentage points, Prasad said, adding that banks currently maintain a spread of 6.5-7 percentage points on such loans.
The smaller MFIs say banks charge at least 13% on loans given to them, forcing them to charge around 30%. One of them, Dhosa Chandaneswar Bratyajana Samity, said it borrows at 13.75% and lends at 27.43%. “We can reduce lending rate to 24% only if banks lowered interest rate by at least 100 basis points,” said its general secretary Animesh Naya. One basis point is equal to one-hundredth of a percentage point.
Already, a number of large MFIs have begun scouting for possible acquisitions among the weaker entities, according to Abhijit Ray, director of Unitus Capital, a firm that arranges funds for MFIs. Even those that have a loan book of Rs35-50 crore might not survive, he said.
Shraddha Nair in Mumbai contributed this story.
manish.b@livemint.com
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First Published: Wed, Dec 01 2010. 11 40 PM IST