Large microfinance institutions (MFIs) operating in Andhra Pradesh are likely to slash interest rates by the end of October, 2010, in line with the finance ministry?s wishes. On Thursday, the country?s biggest MFI, SKS Microfinance, reduced interest rates to 24.55% from 26.69% for customers in the state. Among those looking to prune rates over the next few days are Spandana Sphoorty, SHARE Microfin Limited, Bhartiya Samruddhi Investments and Consulting Services BASIX Group.
“We are still studying the ordinance and are yet to take a decision on the lending rates,?? said a senior official from Basix, who added that the lender needed to reduce our rates to 24% in the next few days.
Alok Prasad, CEO, Microfinance Institutions Network (MFIN) said, ?Directionally, we have been asking MFIs across the country to cut lending rates. However, the extent of the cut would depend on their ability and business model.??
MFIs have come under the scanner for charging high interest rates in the range of 24-36% while they borrow from banks at 10-13%, depending on their creditworthiness. The finance ministry has already asked PSU banks to not extend funds to MFIs, which are charging high interest rates. ?The finance ministry and the Andhra Pradesh government want the MFIs to slash their interest rates to 24%,?? said a rural business banking head from a leading public sector bank, who felt they could operate profitably if they charge around 23%.
Meanwhile, the priority for most of the AP-based MFIs, right now, is to get themselves registered with the district Registering Authority, the Project Director (PD) of District Rural Development Agency (DRDA) for rural areas and PD of MEMPA for urban areas. This is mandatory under the new ordinance passed by AP state government to rein in MFIs following alleged reports of farmer suicides after MFI officials reportedly used force to recover loans. According to a source in the micro finance industry, ?Only 45 to 50% of MFIs have been able to register themselves.??
?SKS has so far registered about 26 districts in AP, it has yet to register in five district,?? added the source. However, this could not be independently verified as the SKS officials were not available for comment. Registration is critical as MFIs would not be able to extend fresh loans or conduct any business in AP without it. Banks that have an exposure of about Rs15,000 crore to the sector, of which 30-35% is in AP, are worried and have stopped disbursing loans to MFIs.
Small Industries Development Bank of India (Sidbi) has an exposure of about Rs 5,000 crore by way of equity and debt to the MFI sector. The RBI has formed a committee under YH Malegam to look into the functioning of the MFIs and their regulation. This committee will submit its report in three months. Currently, the top MFIs, around 20 of them, operate as non-banking finance companies and are regulated by RBI.
