Banks must use a different yardstick to assess the credit-worthiness of small microfinance entities, says Microfinance Industry Network chief executive officer and director Alok Misra. He tells Ajay Ramanathan that the government should adopt measures to facilitate funding to small microfinance institutions.
While MFIs have the option to convert to small finance banks, only a handful of them have made the transition. Why is it so?
We need to look at examples as to why some lenders have converted to small finance banks. They wanted to expand operations into segments like large-ticket MSMEs and corporate loans. While microfinance institutions faced some growth constraints earlier, the March 2022 regulations have ensured that there is no bar on growth. The regulatory arbitrage between banks and NBFC-MFIs has been taken away by the RBI. The only advantage that SFBs have is access to retail deposits. If you look at the interest rates, cracking the liabilities market is not easy, especially in case of retail deposits. Wholesale funding is coming in good measure. Banks have confidence, investors have confidence, arbitrage has been removed. I do not see any compelling reason for NBFC-MFIs to transform themselves into banks.
We recently saw a significant acquisition with Chaitanya India Fin Credit. Going ahead, do you expect some large microfinance institutions to acquire smaller peers?
Well, I have not seen any large entities acquiring smaller ones. It is basically large players consolidating their positions. There have been two major acquisitions in the microfinance segment in the last two years. These were driven by something else rather than market or regulatory logic. Generally, why would you acquire a company? Either you do not have a geographical presence in that area, or you see some other value proposition like specialised knowledge. But, the top 10 players have presence in almost all the states. So, I do not see a market logic in acquisitions, unless some small microfinance institution wants to sell operations and somebody buys it out. I hope the government and regulator will do something for funding stability of small players. We have examples of smaller players growing at a healthy pace, albeit not as fast as larger entities because the latter has an established funding pipeline. But, there is a subset within small microfinance lenders that are having funding constraints and are not growing. If this is resolved, I feel that the logic behind acquiring smaller players will be taken away.
Do you think there is reluctance on the part of banks to lend to small microfinance institutions?
It is not reluctance. Every bank will have some criteria based on net worth, profitability, and credit rating. That is their internal mechanism. But, we have been requesting that you cannot judge smaller players with the same yardstick applicable for larger entities. Of course, it is very difficult for a small player of Rs 200 crore to get an ‘A’ rating or an ‘A+’ rating. So, you need to have a nuanced approach while dealing with the sector. You should look at the sector potential and sector performance rather than just looking at the size of the institution. We want banks to have different yardsticks for measuring different players. You cannot compare apples with oranges.
There is a perception that the microfinance industry is prone to election-related risks. Why is this the case?
I do not see any impact of elections on the sector. When you say this is the market perception, it mainly stems from the perspective that there would be loan waiver. But, the stand of the government has been very consistent in the last 10 years that there won’t be any loan waiver. I do not perceive any turbulence in the sector. It will continue to grow as it is. The April-June season is generally a lean one for disbursements because the financial year comes to a close and stocktaking happens. That effect might be there, but it cannot be attributed to elections. Other than that, I do not have any reason for concern.