In concluding that the Reserve Bank of India (RBI) should be the sole regulator for NBFC-MFIs, the Malegam Committee has given the microfinance sector a fresh lease of life. We?ve already seen the kind of damage that a state government can do?MFI lending is virtually at a standstill in Andhra Pradesh while collections have dropped sharply. As the committee points out: ?The problems get multiplied several-fold when we consider that the example of the Andhra Pradesh Government could be followed by other State Governments.? The lack of effective regulation has dogged the sector and should RBI take over, it would instil confidence in lenders, mainly banks, and help MFIs attract risk capital. The AP government should now be convinced that the Andhra Pradesh Micro Finance Institutions (Regulation of Money Lending) Act is not really needed because its main concerns of usurious loan rates, multiple lending and so on have been addressed.
While MFIs must be relieved that they will not be at the mercy of the whims of state governments, should the recommendations become law, many of the committee?s suggestions would have left one wondering how good a business proposition lending to the poor is going to be. For instance, the prescribed cap on lending rates for MFIs at 24%, CRISIL estimates, could result in a fall in gross interest spreads, for the top five MFIs, of around 5-8%. It?s well known that MFIs have been lending at much higher rates; the average loan rate for the industry today is somewhere around 29-30%, and moreover, new entrants charge far higher rates until they scale up to a point where they have a critical mass of about 5,00,000 members. While a ceiling may not be really out of place since we?re dealing with a vulnerable and politically sensitive segment of the population, there should be some way to ensure that MFIs are not out of the money when interest rates in the system move up sharply. It?s clear though that only serious lenders, looking for nothing more than reasonable returns, will hang in there.
Where the committee has overdone things is in saying there should be a cap, on MFIs margins, of 10%?the average net interest margin currently is believed to be around 14%. While the committee?s calculation of the cost of funds assumes a debt-equity ratio of 85:15, in reality, very few MFIs operate with such a low capital base. Indeed, start-ups rarely have access to any other kind of money than capital and for such MFIs the cost of funds would be much higher. On an average, for the industry, the debt-equity ratio would be closer to 70:30. A ceiling on margins isn?t really called for because the cap of 24%, on the loan rate, should more than take care of any concerns relating to overpricing.
From a borrower?s point of view, the suggestion that will hurt the most is the one that says MFIs can only lend to households with an annual income of Rs 50,000 or roughly Rs 4,200 a month. What this effectively means is that someone earning more than Rs 4,200 per month can neither access banks nor MFIs and so will ultimately land up at the moneylender?s doorstep. Only if her income drops below the Rs 4,200 level?which could well happen because of the kind of rates that the moneylender will charge her?can MFIs lend to her. Also, a fair share of the 56% of the poor, who are in urban India, would be left out of the universe that MFIs can lend to. Again, the cap of Rs 25,000 per borrower will force those looking for money beyond this amount to seek out moneylenders. While the average loan ticket size today is close to Rs 14,000, and the Rs 25,000 limit has probably been set to ensure that households don?t become over-indebted, the measure ends up hurting genuine borrowers.
As for saying that 75% of the loan amount should be earmarked for income generation, tracking and proving this is easier said than done. The fact that borrowers aren?t being allowed to over-leverage should address the concern that most of the money would be mis-spent on consumption. All in all, MFIs will now hopefully spend less time in the courts; they will need the time to work on their spreadsheets.
?shobhana.subramanian@expressindia.com
