At present, MFIs can lend 15 percent of their total assets outside the guidelines governing MFI lending. Such loans do not qualify as priority sector lending (PSL).
With the impact of demonetisation reducing, microfinance institutions network (MFIN) has revived its demand to allow MFIs to lend 30 percent of assets to the small and mid-sized segments.
At present, microfinance institutions (MFIs) can lend 15 percent of their total assets outside the guidelines governing MFI lending, which includes income and loan cap criteria among others. Such loans do not qualify as priority sector lending (PSL).
After almost 20 months of scrapping high-value Rs 1,000 and 500 notes, the heavily impacted micro-lending firms must expand and grow beyond micro loans, said Udaya Kumar, President of MFIN, the self-regulatory body for non-banking financial companies (NBFCs) that are MFIs.
“We have requested the regulator to tweak the qualifying asset norm in which MFIs can lend just 15 percent to non-micro loans. It is an 80-year old rule and we believe, MFIs can do much more than micro loans, maybe increase it to 30 percent than limit it to 15 percent to the medium segment or the MSME loans. We a persuading the RBI to consider it,” Kumar told Moneycontrol.
In 2014, the demand was first made to the Reserve Bank of India (RBI), the regulator for NBFCs and banks, to reduce the quantum of qualifying assets for MFI loans from 85 percent to 70 percent.
As on March-end 2018, the outstanding loans stood at Rs 1.37 lakh crore, with a growth of 27 percent over last year. Of the loans, banks constitute a total of 38 percent of the loans while small finance banks’ share stood at 27 percent.
Kumar said there are immense potential and opportunity in the MFI lending business and this (tweak to 30 percent) can push growth, which had reduced to about 26-27 percent post demonetisation as against a healthy growth rate of 50-60 percent in pre-demonetisation days.
Demonetisation blow to MFIs
The cash-heavy industry suffered huge collection issues as repayment rate dropped to as low as 40 percent after demonetisation was announced on November 8, 2016, as against almost 98-99 percent previously.
Delinquencies of more than 30 days were nearly 6 percent at the end of December 2017, up from 0.3 percent at the end of September 2016. It had soared to 14.1 percent at the end of March 2017.
Now, the collection has improved with overall 4.44 percent of the total old (3.3 percent) and new (1.14 percent) book with a repayment delay of 30 days.
“Though there was a large impact due to demonetisation, as stakeholders not one MFI has defaulted on any of the bond coupons and that is a validity of the resilience of the industry and now we have started growing back to normalcy. The whole industry grew at 26-27 percent last year but is coming back to 50 percent..,” said Kumar, who is also the CEO and managing director of CreditAccess Grameen Ltd.
He also said the current situation in the banking sector with as many as 11 banks under prompt corrective action (PCA) could lead to higher borrowing costs for MFIs as these banks cannot lend to them.
At present, the average cost of funds for NBFC-MFIs has reduced marginally from 14.9 percent in 2016-17 to 14.4 percent in 2017-18.
However, Kumar draws comfort from the fact that many banks such as IndusInd Bank, IDFC Bank, RBL bank and others have acquired stakes in MFIs, giving a validity to the MFI business model and that the opportunity to grow is noticed by banks too.
“Despite the troubles, the growth potential is still high and data indicates, MFIs have grown faster than other financial companies. This year, 40 percent equity financing has grown, so investor faith is also growing,” Kumar added.
According to him, the expansion and recruiting of the rural or local people are important. “Also, MFIs have a responsibility to create awareness to adapt to the new changes, technology, continuous efforts on repayments, etc… Sometimes they are not ready to move away (from moneylenders),” Kumar said adding that MFIN is trying to work with RBI to get training for almost one lakh employees of the total 48 MFIs which in turn can help train customers as well.
He expects the industry to grow by 50-60 percent with a capital requirement of approximately over Rs 1,000 crore.
