Functioning to be hit if recommendations accepted, say bankers.
The Malegam Committee’s report on microfinance institutions (MFIs) was being seen as bringing relief to low-income borrowers. However, it has made banks apprehensive about the proposed framework. The functioning of MFIs might be affected if the stringent norms suggested by the committee were implemented, bankers said.
Set up by the Reserve Bank of India (RBI) to look into the issues concerning the MFI industry, the committee had suggested caps on interest rates and margins. While it suggested an average margin cap of 10 per cent for MFIs with a loan portfolio of Rs 100 crore, a cap of 12 per cent was recommended for smaller players. Also, it suggested capping the interest on individual loans at 24 per cent.
MFIs are allowed to levy only three charges — processing fee, interest, and insurance charge. The committee also suggested that loans extended to a single borrower be capped at Rs 25,000.
According to bankers, MFIs — especially the smaller ones — will come under pressure in terms of profitability if the committee’s suggestions are made mandatory. On March 17, leading bankers will meet the RBI brass and give their feedback.
MFIs raise 75-80 per cent of their funds via bank borrowings, 15 per cent from equity and 10 per cent from sources like cash securities. As of now, interest rates charged by them hover around 18-32 per cent, bankers say. Bank finance to MFIs is categorised as priority-sector lending.
To hedge risks, MFIs have been asked to replace weak collateral with better-quality assets, as banks are worried about the deteriorating quality of the loan portfolio of some MFIs, particularly those operating in Andhra Pradesh.
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Banks are seeking booked business (loans to borrowers) as primary security before approving a fresh line of credit to MFIs.
Following the events in Andhra Pradesh (political controversy on lending practices, new rules to curb functioning), since October, standard loans have been converted into non-performing assets for banks, leading to a sharp dip in the repayments from MFI borrowers.
The main critics of the Malegam committee report are of the opinion that smaller MFIs will cease to exist since the report favours capping margins and interest rates. However, the committee argued that consolidation was necessary as too many smaller MFIs might put the banking system at risk, since two-thirds of their funding requirements are met by banks.
“The main reason we need an optimum size is that costs fall when you achieve a certain size. Thus, you can afford offering a lower interest rate. Also, 75 per cent of MFI funding is through the banking system. So, if all MFIs remain small, the risk to the banking system would become very large. If this leads to some consolidation, that is unavoidable,” Y H Malegam had said.