Say may have to bank on service area approach to expand.
If the Malegam committee’s recommendations are accepted, microfinance institutions (MFIs) say they may adopt a service area approach to expand. They also expect consolidation and a fall in margins.
The committee, headed by Y H Malegam, was set up by the Reserve Bank of India (RBI) to review the functioning of MFIs.
“We will have to look at new geographies to sustain growth as only two MFIs will be allowed to serve a self-help or a joint-liability group. We might as well look at the service area approach to find new customers and be competitive,’’ said P Kishore Kumar, managing director, Trident Microfinance.
The service area approach is not new to the banking sector. First implemented in 1989, banks were allotted specific villages for credit planning and lending. However, it was done away with in 2005, giving borrowers the option to receive credit from the bank of their choice.
Welcoming the recommendations, Kumar said the report would put an end to regulatory uncertainty. “There will be a clear-cut decrease in revenues by about five per cent if these recommendations are implemented,’’ he said, adding the sector had given up to 50 per cent return on investment. However, these would now stabilise around 20 per cent. The return on assets would be two-three per cent, he said.
Dilli Raj, the chief financial officer of SKS Microfinance, the largest and the only listed MFI in the country, said consolidation would happen as the recommendations would raised the entry barriers for new players.
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“Growth will come from new geographies. New and smaller players will find it difficult to sustain,’’ he said.
With 7.8 million members and 6.6 million active borrowers, SKS has 2,407 branches. It has total outstanding loans of Rs 5,400 crore, including an off-balancesheet amount of Rs 486 crore. Andhra Pradesh accounts for 22 per cent of this loan.
“MFIs are not allowed to use mobile banking. They would have to cut operational costs significantly as the number of physical transactions would come down drastically. The resources used for recovery could be used more effectively or passed on to the borrowers,’’ he said. During 2009-10, the company’s operational cost stood at 12.7 per cent. It came down to 10.4 per cent in 2010-11. “We see the trend moving in the same direction,’’ he said.
The committee has capped the interest rate at 24 per cent. Also, MFIs will be allowed to charge a processing fee of one per cent and pass the actual insurance charges (about 0.7 per cent of the total loan) to members.
At present, SKS charges 24.55 per cent, inclusive of the processing fee. Its cost of funds in the last quarter was 11.5 per cent and averages 15 per cent. The committee’s recommendations allow a margin of 10 per cent. “The difference in the interest yield will be marginal,’’ he said, adding the yield would come down by 120 to 200 basis points.
Sajeev Vishwanathan, chief executive officer of Bhartiya Samruddhi Finance, an arm of Basix, said the recommendations provided a protective framework to MFIs for legitimately conducting operations. However, a lot of details needed to emerge as far as execution was concerned, he said.
“There will be no or minimal impact on interest yields of the big players. The smaller ones will have to wait longer to achieve breakeven,’’ he said. Typically, a branch breaks even in six to nine months.
Spandana Sphoorty Financial Limited’s Vice-President (risk management) Nitin Agrawal said it could not be immediately said if revenues and interest yields would fall. “There are a lot of provisions to be understood,’’ he said.