Warns faster cuts may hurt expansion & access
SKS Microfinance Ltd, India’s largest microfinance institution, says it can reduce lending rates from the present 26 per cent to 24 per cent but not more.
Further cuts, it says, will take time and won’t be easy. “It may also be difficult for smaller MFIs to meet such caps,” warned SKS Founder-Chairman Vikram Akula. He was speaking in connection with the ordinance the Andhra Pradesh government has issued setting rules for lending and recovery activities of MFIs.
“If the state government, the Reserve Bank of India or the finance ministry advises us to reduce interest rates, we will (try to) do so over a period of time,” he said. Akula said economies of scale would come into play with a tighter vigil and smaller MFIs would find it difficult to comply.
Why rates are high
Akula implied he found it odd that MFIs were being asked to cap lending rates at the state’s behest at a time RBI and the finance ministry were speaking in favour of deregulation of interest rates. High rates, he underlined, were not being charged by his company for its own sake. Andhra Pradesh recently reported 25-odd cases of suicides by borrowers. Of them, 17 were reported to have taken loans from SKS.
“A majority of the suicides were not by our borrowers and, even if they were, they were not defaulters. There were no arrears too. It suggests that suicide is a complex issue. Nobody will end her life for not paying a paltry Rs 225 a week,” Akula said.
He stressed that multiple lending need not be equated with over-lending, as data suggested the average credit need was around Rs 30,000 per person. More, people got a return of between 45 per cent and 250 per cent from the businesses for which they took loans.
Akula’s defence of what the state government thinks are overly high rates charged by MFIs is the economics of the business. He says they borrow from over 60 banks at about 8.5 per cent. The delivery costs for the company work out to another nine per cent, he says. It sets aside one per cent for hardship cases, 1.5 per cent for loan-loss provisions and three per cent for corporate tax.
“To give a Rs 10,000 loan (the average for an SKS borrower) and to send an agent on a two-wheeler to recollect Rs 200 a week is a costly affair,” he said. He said a four per cent margin was required to ensure that investors from whom funds had been raised continued to put money in the company to extend loans to more people.
On whether the ordinance would hit the company’s profitability, Akula said it would not. Additional revenues from insurance and housing loan products would offset the potential losses from reduced interest rates, he said.
Ex-CEO’s dismissal
On the controversial board resolution which removed former managing director and chief executive officer Suresh Gurumani, Akula maintained: “Post IPO, there emerged an interpersonal conflict between the former CEO and the other management. It is important to have a team that is aligned for success of a business.”
