Looking at re-engineering business models to reduce expenditure.
Small and mid-sized microfinance institutions (MFIs) are likely to seek more time to comply with the recommendations of the Malegam Committee report.
The institutions plan make a representation to the regulator through the Micro Finance Institution Network (MFIN), asking for at least 12-18 months to bring down their interest rates to 24 per cent. Smaller MFIs charge 31-50 per cent.
The Reserve Bank of India (RBI) has said that it will take a decision on implementing the recommendations by the end of March. The committee has suggested that if its recommendations are accepted, they should be implemented by April 1.
“It is only fair that MFIs are given some time to get to this in a phased manner. Businesses are forecast on the basis of certain assumptions with respect to revenue and costs for both people and equipment,” said Ajay Verma, managing director and CEO of Sahayta Microfinance.
MFIs are primarily looking at re-engineering their business models and processes to reduce operational expenses. MFIs expect expansion plans to be hit due to the high cost of setting up infrastructure.
“MFIs in the business for less than three years should be given 12-18 months to bring down their rates. We will have to put brakes on our expansion plans,” said Govind Singh founder and CEO of Utkarsh Micro Finance.
Generally, the operational cost in the initial three years is 15 per cent. To be operationally viable, MFIs will have to bring down costs significantly, according to the committee’s suggestions.
As expansion plans of smaller MFIs would be hit, executives expect unbanked areas to get deprived of financial services.
Verma says economies of scale do not work in favour of the organisation during the first few years and so a differential rate cap will help smaller organisations cope.
Arohan Financial Services said it was fortunate to have been in the business for five years and grown to its present size to implement the cap. “We will manage for now. Our profitability will be squeezed. We don’t know who will invest in us,” said Shubhankar Sengupta, CEO.
A Prasad, chief executive of MFIN, said smaller MFIs faced bigger challenges. “In fairness to small and mid-sized MFIs, they should be given a fair opportunity,” he said.
