Micro lenders seem discontented with the relaxations offered by the Reserve Bank of India (RBI) on the functioning of non-banking finance company-microfinance institutions (NBFC-MFI).
The industry body for microfinance companies, Micro Finance Institutions Network (MFIN), plans to approach the banking regulator for more headroom on the margin of large NBFC-MFIs.
“Though RBI has given pricing flexibility to the MFIs, it has been done in conjunction with a tightening of the margin caps. For MFIs with loan portfolios greater than Rs 100 crore, the margin cap has been reduced to 10 per cent. This reduction will put pressures on their profitability and sustainability,” Alok Prasad, chief executive of MFIN, told Business Standard.
“We will again meet the central bank and explain our position to them. For the margin requirements, a restoration of status quo ante (the way things were before) will be sought.” Last week, RBI offered some relief to the stressed microfinance sector by waiving the 26 per cent cap on their lending rates. The banking regulator, however, retained the margin cap with some modifications in the norms.
The margin cap, earlier fixed at 12 per cent, has now been fixed at 10 per cent for large micro lenders and retained at 12 per cent for other microfinance companies. RBI said NBFC-MFIs need to ensure that the average interest rate on loans during a financial year does not exceed the average borrowing cost during that financial year plus the margin, within the prescribed cap. More, while the rate of interest on individual loans might exceed 26 per cent, the maximum variance permitted for individual loans between the minimum and maximum interest rates cannot exceed four per cent, it added.
Prasad said a margin cap of 12 per cent for all microfinance companies would be “fair and reasonable”.
While he admitted that RBI’s revised norms for NBFC-MFIs would provide some relief to the troubled microfinance sector, he said the government of Andhra Pradesh should relax rules to revive micro lending business in the state.
In October 2010, the Andhra Pradesh government passed a legislation to restrict micro lending of private players following reports that these lenders charge exorbitant interest and use coercive methods to recover loans. It mandated compulsory registration of microfinance companies, loan collection near local government offices, and banned weekly recovery of loans.
“RBI has made considerable efforts towards addressing the issue of (microfinance companies’) Andhra Pradesh loan portfolios. However, given the nature of the problem, the issue remains alive. For dealing with it systemically, the Andhra Pradesh government has to be brought into the equation,” Prasad said.
The central bank has said that the provisions made on Andhra Pradesh loan portfolios would now be notionally reckoned as part of micro lender’s net worth and this recognition would be progressively reduced equally over five years, till March 2017.
This would ensure that despite making provisions on Andhra Pradesh loan portfolios, which are non-performing for nearly two years now, microfinance companies are able to maintain their capital adequacy as their net worth would not be eroded. Microfinance companies would have to maintain a capital adequacy ratio of 15 per cent.