Capping interest rates affects margins, says Vikram Akula2 min read . Updated: 15 Oct 2010, 09:23 PM IST
Capping interest rates affects margins, says Vikram Akula
Hyderabad: India’s fastest growing, largest and only listed microfinance institution SKS Microfinance Ltd may see its profit margins coming under pressure if the finance ministry or banking regulator directs capping interest rates charged by MFIs, admits founder and chairman Vikram Akula.
Talking to reporters on Friday to air his views on the ordinance promulgated by Andhra Pradesh government to regulate MFIs, Akula said his company is currently charging 26% interest on loans given to poor, the lowest available now in the country.
Saying that the state governments cannot impose ceilings on interest rates charged by the MFIs since they are registered as non-banking financial companies (NBFCs) with the Reserve Bank of India (RBI), he said only the ministry or RBI can decide capping the rates. SKS has already brought down its interest rates significantly several times over the last 13 years and will bring down further to 24% if the ministry or RBI directs so, said Akula.
Akula’s statement comes in the light of the ordinance promulgated by the AP government on Friday, which has indirectly placed caps on interest rates charged by MFIs, though admitting that interest rate regulation was not in its purview.
SKS has some 2 million of its total 7.3 million borrowers from AP, who account for some 25% of its total loan portfolio of some Rs4,321 crore at present.
Vatti Vasantha Kumar, AP minister of rural development, told reporters that the ordinance of his government prohibits MFIs from recovering an interest amount more than the principle amount irrespective of the loan tenure and inordinate delays in payments by borrowers.
While this stipulation does not apply to the loans already paid back by the borrowers, the minister said the MFIs will have to refund the excess interest amount paid by the borrower if the loan is still subsisting, he said.
Akula said the company is currently enjoying a profit margin of 4%-5% while lending at 26% to poor. The cost of borrowings worked out to 8.5%, cost of operations 9%, provisions stipulated by regulator to 1.5% and corporate tax 3%, taking the total to some 22%.
He said if the company has to lend at 24% following the ministry or RBI directives, if any in future, then its profit margins will get squeezed to 2%-3%, down by some 200 basis points.
However, Akula was quick to add that the company is confident of addressing the issue of pressure on margins through economies of scale with over 7.3 million borrowers on its rolls and diversified product portfolio that includes insurance and housing loans.
Admitting that 17 out of some 30 poor in Andhra Pradesh committed suicides recently were SKS borrowers, Akula however said his company never resorted to unethical recovery practices or strong-arm tactic in recovering dues from borrowers. In fact, he said the deceased borrowers were not defaulters of SKS and they would have been driven to suicides by other factors such as pressure for repayment of dues by other MFIs that lent money to the same borrowers.