AP urges RBI to bar MFIs from tapping capital markets, PE funds

AP urges RBI to bar MFIs from tapping capital markets, PE funds

Hyderabad: The Andhra Pradesh government on Thursday urged a Reserve Bank of India (RBI) panel to bar micro finance institutions (MFIs) from tapping capital markets and seeking private equity investments arguing this has made micro lenders more profit hungry.

Early this week, the state government had passed a controversial ordinance to check the strong arm methods allegedly used by some MFIs to recover loans from poor borrowers.

This, allegedly, has led to rising number of suicides in the southern state. The high interest rates charged by microlenders also came under heavy criticism.

Following this, the RBI constituted a panel headed by chartered accountant Y H Malegam. The committee, which is likely to submit its report by next month, visited the state on Thursday to take a stock of the situation.

Submitting a report to the panel, the state government alleged that profit-seeking MFIs, backed private investors, has resulted in the current plight of microfinance borrowers.

MFIs found it was “necessary to make profit to grow and garner funds from the outside resources and marketing it as a good business opportunity among private equity funds," said the state government in its report.

“The point is that the funds flowing from outside have only one concern – higher profit, at whatever cost. The poor have become an object of profit, a business opportunity," said Reddy Subrahmanyam, principal secretary with AP’s panchayat raj and rural development ministry.

The government has submitted to Malegam that PE investors from across the globe were being lured by the higher profits and high returns showcased by the for profit MFIs.

These “PEs are not social investors and therefore drive MFIs to earn more profits for them, defeating the very purpose of financial inclusion," said Reddy Subrahmanyam.

In its report to Malegam panel, the government appealed, “The MFIs shall not be allowed to go for IPOs (initial public offerings) as they have to generate more and more profits, defeating the very purpose of microfinance."

Also, referring to the high return of assets (RoA) of 4%-5% of MFIs, the government said it was “considered very high and there is a need to rationalize the same in tune with other similar financial institutions."

In this context, the government has advised the Malegam panel to consider capping the interest rates charged by MFIs while lending to tiny borrowers, which ranged from 30%-40%. “We propose that a cap of 8% on the interest rate spread may be imposed on interest rates being charged by MFIs."

Interest spread is the difference between the interest rate at which MFIs borrow from banks and institutions and the rate at which they lend to tiny borrowers.

AP government, which did not propose any measures in its microfinance bill to cap interest rates charged by MFIs, said, “Implementation of this maximum cap on the interest rate spread is best done by state governments, which have the machinery to verify the situation in the field."

Responding to a debate whether the interest rates charged by MFIs can be regulated by the state government, Reddy Subrahmanyam said, “Considering that state governments have been regulating interest rates being charged by money lenders, there is no reason why the state governments should not be regulating the MFI lending rates."

Referring to the key provision of monthly repayments by the micro borrowers stipulated in its microfinance bill, the AP government said, “monthly collection system would significantly reduce operational cost of MFIs" and “such benefits could be passed on to the poor."