The finance ministry has endorsed the Reserve Bank?s view that banks need to exercise extra caution while lending to micro finance institutions (MFIs).
?We do apprehend that certain institutions that are quite active in the micro-finance segment would go belly up in the future because of the business model they chose to follow,? a senior finance ministry official said. According to him, a lot of cross lending is happening, especially in southern states such as Andhra Pradesh, where micro credit borrowers are on an average members of at least three institutions.
Sources said RBI last week asked commercial banks to exercise extra caution while lending to MFIs and to re-evaluate their current exposure to the segment. The directive to several banks, closely after the micro finance major SKS successfully closed its initial public offering, flags the concern shared by the central bank and finance ministry regarding the business model of certain players in the segment.
Sharing RBI?s concern on sustainability of the model, the finance ministry official pointed out, any systemic problems with large non-bank financial- sector players can endanger financial stability. ?Some inherent risks like worsening credit quality, high leverage levels and risk of defaults are bound to wreak havoc if overheating continues in the MFI ecosystem? the official said.
Under the current regulations, banks can define their lending to MFIs as priority sector lending, which allows them to keep lesser provisions for the same. It is mandatory for banks to reserve 40% of their total lending to priority sector. This gives MFIs access to funds at cheap rates which they lend at high rates to people at the bottom of the pyramid after factoring in the margin, transaction costs and risk costs involved in these small ticket lending.
Some MFIs have been pocketing a margin as high as 15% or more, pushing up the interest rate for the end borrowers to 40%. The micro finance Bill, which was first introduced in Parliament in 2007 to improve the regulatory environment for micro credit, is yet to be passed.
An RBI official told FE, ?If we define financial inclusion efforts as providing access to appropriate financial products and services to the most vulnerable group of society in a fair, transparent and cost-effective manner then obviously many micro finance institutions do not fit the bill.? The central bank had earlier pulled up the micro finance institutions for the high rate of interest that they charge on micro credit, which make them a favorite private equity investment play. ?With the current available credit for the poor being at about Rs 20,000 crore, less than one tenth of the requirement, we cannot ignore the MFIs but will have to monitor them more closely,? the RBI official added.
The high valuation that SKS commanded may encourage several other players, including Share Microfin Ltd and Asmitha Microfin, to look at tapping the equity markets.
SKS microfinance?s Rs 1,654 crore IPO was oversubscribed by 13.69 times and the scrip is expected to be listed on the bourses on August 16. Several brokerage houses had approached the issue in which price was decided at upper end of the band.