Malegam panel recommendations not feasible, say microlenders

Malegam panel recommendations not feasible, say microlenders

Mumbai: Microfinance institutions, or MFIs, could well run into a crisis if certain recommendations of a Reserve Bank of India (RBI) panel are implemented in the current form, executives in the business warned, even as shares of SKS Microfinance Ltd, the largest and lone listed MFI in the country, rose 3.84% to close at Rs694.25 apiece on Thursday on the Bombay Stock Exchange. The stock rose 13.08% intraday to Rs756. The exchange’s benchmark index, the Sensex, rose 0.36% to close at 19,046.54 points.

Udaia Kumar, managing director of Share Microfin Ltd, and a member of Microfinance Institutions Network, an industry lobby group, said MFIs would approach RBI to sort out some of the contentious issues in the report.

MFIs, in the business of lending tiny loans to poor people, are already facing a tough time in Andhra Pradesh on account of a controversial state law.

The RBI committee, headed by noted chartered accountant Y.H. Malegam, has proposed capping the interest rate at 24% for individual loans; a ceiling of Rs50,000 on the annual family income of the borrower; and a Rs25,000 ceiling for loans to a single borrower. The proposals, if accepted, will be implemented by 1 April.

More than the cap on the loan rate, MFIs are worried about the ceilings on income and loan amount.

Senior executives in MFIs said most of the people who currently borrow from them will not be able to access money if these limits are implemented as a majority belong to families with an annual income in excess of Rs50,000, and require loans higher than Rs25,000. Smaller MFIs, in particular, will be severely hurt, they added.

“The downside of the Malegam panel recommendations is quite severe. For example, when a person gets micro-credit and becomes an entrepreneur, his credit needs will expand and he won’t be able to get funding from any other source. Banks do not touch this group anyway and MFIs were the only source for money. So a limit of Rs25,000 is infeasible," Chandra Shekhar Ghosh, chairman and managing director of Bandhan Financial Services Pvt. Ltd, said. Bandhan is the fourth largest MFI by assets with Rs2,339 crore loan outstandings in December.

According to Ghosh, at least 60% of the households in the country have an annual income of around Rs2 lakh.

The panel has said that not more than two MFIs can lend to a single borrower, besides limiting the membership of a borrower to one self-help group (SHG) or joint liability group. This could also hamper the business of MFIs as most of their borrowers are part of more than one SHG or small groups of six-seven people.

“It becomes extremely difficult to assess the family income of the borrower. Similarly, the loan cap of Rs25,000 is not practical to implement as the requirement of the borrowers in Andhra Pradesh is much higher," Kumar of Share said.

Andhra Pradesh accounts for more than a quarter of the Rs20,000 crore microlending industry in the country and has 9.7 million microfinance borrowers.

“Even a house maid will have more than Rs50,000 annual income. I think the poor customer definition has to be widened much further. If you go to a slightly higher segment, this requirement will be a lot higher. It will eliminate our target class customers besides impacting growth," Samit Ghosh, chief executive and managing director of Ujjivan Financial Services Ltd, said. Ujjivan had an asset base of Rs675 crore and a customer base of a little less than 1 million in December.

Similarly, the recommendation to cap the interest rate and profit margins could lead to the closure of smaller microlending companies, whose cost of borrowing is higher than their larger counterparts, the executives at MFIs said.

Most of the larger MFIs in Andhra Pradesh have brought down their rates to around 24% in the last two months after the finance ministry expressed its displeasure on MFIs charging higher rates. Still, smaller MFIs charge in the range of 27-36% rate to balance their costs.

“Only larger MFIs will be able to manage with 24% rate. Smaller ones cannot survive. So much of micromanagement is not desirable for the growth of the sector. The committee should have discussed these issues with the smaller MFIs before making such recommendations," said Shubhankar Sengupta of Arohan Financial Services Ltd, a relatively smaller MFI with a loan book of Rs105 crore and 240,000 borrowers.

The recommendation to cap margins at 10% for MFIs having a loan portfolio of Rs100 crore and 12% for smaller MFIs has also raised eyebrows, with MFIs saying this is difficult to implement, especially when the committee has not recommended any ways to reduce the cost of funds.

Margin is the difference between the rate at which MFIs borrow from banks and the rate at which they lend to their borrowers.

“It is very difficult to implement this cap, especially when the committee has not suggested any ways to bring down our costs. They should have looked at incentivizing MFIs by categorizing MFIs in three categories according to the household income," Gupta said.

Bandhan’s Ghosh echoed the sentiment. “Banks don’t cap interest rates for us, how can we cap our lending rates? I can’t tell this to borrowers that because the banks have hiked their interest rates we are hiking our lending rates."

Rating agency Icra said the key challenge would be to implement and monitor the restrictions, especially till the time a proposed credit information bureau for microfinance is functional. It added that restrictions on the total loan size of Rs25,000 may not fulfil entire financing requirement of an individual borrower, forcing the person to look at alternate avenues for funding.

Icra also said stricter eligibility criteria could lead to significant drop in growth to 10-22% a year over the next five years as against over 100% growth seen in last two years.

The industry plunged into a crisis in mid-October when a new state law in Andhra Pradesh restricted MFIs from doing weekly collections and made government approval mandatory for a second loan to the same customer.

Collection rates fell to 10-20% and MFIs virtually stopped lending to borrowers. Due to the uncertainty, banks also stopped lending to MFIs.