Microfinance institutions in Andhra Pradesh have urged the Reserve Bank of India (RBI) to allow them more time to meet the new capital adequacy norms, as they are not able to raise fresh funds because of the crisis in the sector.
The Micro Finance Institutions Network (MFIN), the industry body for micro-lenders in India, has approached the central bank for an extension of the deadline beyond March 31, 2012, three people familiar with the development said.
In December, RBI said the minimum capital adequacy ratio for any non-banking finance company microfinance institution (NBFC-MFI) must be 15 per cent.
The central bank, however, said microfinance companies with more than 25 per cent of loan portfolio in Andhra Pradesh could maintain a minimum capital adequacy ratio (CAR) of 12 per cent in the current financial year. But from April 2012, these micro-lenders will have to maintain the !5 per cent rule.
“In principle, RBI’s move to extend support to the sector by bringing it under its direct regulation is encouraging. But practically, none of the microfinance institutions, barring maybe one or two, will be able to meet the higher norms,” said the promoter of one in Andhra Pradesh requesting anonymity because of the sensitivity of the issue.
"We have asked RBI to consider extension of the deadline beyond March 31. Otherwise, most microfinance companies in the state (of Andhra Pradesh) are facing the risk of losing their licence to do business," the official added.
Micro-lenders said because of the crisis in the microfinance industry since October 2010, existing investors are not willing to increase exposure in the sector, while no new investors are keen in picking up stake in the beleaguered firms.
The crisis began when the government of Andhra Pradesh, the largest market for microfinance companies in India at that time, passed a legislation that banned weekly repayment of micro loans. It curbed micro-lending activities and eroded profitability of microfinance companies operating there.
Microfinance companies said in many small firms the additional capital requirements to meet the new norms are so high that promoters alone cannot cover the gap and will have to depend on existing and new investors.
“To meet the new capital adequacy norms, we need to bring in capital that is higher than our existing equity base. In this environment, where banks are reluctant to offer fresh loans, it is impossible to convince private equity players to invest in our company,” said the CEO of a Hyderabad-based microfinance firm.
