After gaining big time from micro lending, microfinance institutions (MFIs) are facing more than a few barriers.
The Andhra Pradesh government’s last week ordinance, which coincided with the controversy surrounding Suresh Gurumani’s ouster as the chief executive officer of SKS Microfinance, and a nudge to cut their lending rates could put pressure on their margins and also affect growth, according to industry experts.
By setting up a committee, the Reserve Bank of India also announced its intention to increase scrutiny of these institutions. Several MFIs plan to cut their lending rates after SKS Microfinance, the largest MFI, said it was willing to lower its lending rates by two percentage points. Spandana, the second-largest MFI, will evaluate to bring down rates, according to Managing Director Padmaja Reddy. Udaia Kumar, founder of Share Microfin, said they planned to reduce their interest rates by one to two per cent, from about 24 per cent at present.
The new ordinance by Andhra Pradesh government will increase the cost of operations of MFIs by at least two per cent, industry experts say. The ordinance seeks to regulate MFIs through fast-track courts and transparency in interest rates.
“The MFI sector will surely face some bottlenecks in the coming days and fund flows might suffer, as our cost of operations will also increase because of the new ordinance of the Andhra Pradesh government,’’ said Udaia Kumar. MFIs claim high interest rates are justified because of high cost of operations involved in doorstep banking, as high as 10 per cent. The increase in cost of borrowing by about one per cent in the last six months, due to hardening of interest rates, has shrunk the margins of MFIs, say some insiders.
“We are not in a position to reduce interest rates further, as the cost of funds have already gone up by around one per cent in the last few months,” said P N Vasudevan, managing director, Equitas. While the present lending rate stands at 26.50 per cent, Equitas’ net interest margin is about 3 per cent.
“Interest rates have come down from the level of 30-36 per cent over a decade ago to 24-26 per cent,’’ said Shashi Shrivastava, vice-president of Grameen Capital India, an MFI advisory firm. “But further reduction in rates will only depend on economies of scale and technology, as the cost of funds is an important factor.’’ Bandhan, the fourth-largest MFI in the country, slashed rates by five per cent to 19 per cent in May. Ujjivan, another MFI, reduced its interest rates by two-three per cent across different products from 24-25 per cent. Basix, one of the oldest MFIs in the country, reduced rates by four per cent to 24 per cent in April.
“Our operating cost will definitely rise once the ordinance comes into force. The bad and doubtful debt may also rise,” said S Ramachandran, country business manager of Basix.
