The Microfinance Institutions Network (MFIN), the representative body of microfinance institutions (MFIs), has sought two years’ time from the Reserve Bank of India (RBI) for meeting the newly-introduced norms on margin cap on loans.
RBI on August 3 had said the margin cap on loans should be revised to 10 per cent for large MFIs (with loans portfolios exceeding Rs 100 crore) and 12 per cent for MFIs with less than Rs 100 crore portfolio.
In a recent letter written to the apex bank, Alok Prasad, chief executive officer of MFIN, had said even if it was imperative for RBI to stipulate a 10 per cent margin cap, it should be implemented in a phased manner, preferably over two years.
Earlier, MFIN had said it was in favour of a 12 per cent margin cap for all MFIs, irrespective of its size—a demand which it has also put forward to RBI in its letter. “RBI will look into our demand,” Prasad said.
As per the Malegam Committee recommendations, the interest rate cap on loans given by MFIs was fixed at 26 per cent, under guidelines issued on December 2, 2011. However, to allow operational flexibility, RBI had said non-banking finance company (NBFC)-MFIs should ensure that the average interest rate on loans during a financial year did not exceed the average borrowing cost during that year plus the margin, within the prescribed cap.
While the rate of interest on individual loans may exceed 26 per cent, the maximum variance permitted for individual loans between the minimum and maximum interest rate cannot exceed four per cent, RBI had said. In addition, the central bank had said the cap on margins as defined by the Malegam Committee might not exceed 10 per cent for large MFIs and 12 per cent for the others.
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The MFI sector had been bleeding since October 2010, when the Andhra Pradesh government had issued an ordinance that curbed fresh lending and recovery of loans in the state. The impact translated into bad loans worth as much as Rs 6,000 crore of toxic .
Post the regulation, the number of MFI clients declined almost 17 per cent, while the number of loan accounts fell 22 per cent in 2011-12, according to data available with MFIN. The gross disbursements, too, dropped 38 per cent in 2011-12 over the last financial year. Last financial year, the MFI industry saw write-offs worth Rs 1,779 crore, with write-offs in Andhra Pradesh only increasing by 188 per cent.