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| Road bump for MFIs | | Government meddling versus super profits |
| Business Standard / New Delhi Sep 27, 2010, 00:21 IST |
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The Union finance ministry has written to public sector banks in its capacity of majority owner asking them to ensure that microfinance institutions (MFIs) do not lend to the poor at more than 22-24 per cent interest rate, calculated on the basis of diminishing balances, what they borrow from banks. This comes in the wake of the Reserve Bank of India (RBI) considering taking bank lending to MFIs out of loans that qualify for priority sector lending. Earlier, an expert committee on rural credit had recommended that the moneylender definition be extended to include for-profit closely held MFIs. Two developments can have something to do with all this. A leading MFI, SKS Microfinance, has completed a successful public issue in which the founding interests have exited at a huge profit. Most recently, trouble is brewing again in Andhra Pradesh, which leads in MFI lending, over loans to tribals.
The reaction in microfinance circles is predictable. The overall feeling is that the directive, if seriously implemented, will lead to the closure of many smaller MFIs that do not have any other significant source of funding. On the other hand, the government directive emphasises that it is particularly applicable to large and well-established MFIs. If this qualification is followed, then the future of small MFIs will be taken care of. But private equity players who see a good opportunity in this space are not happy. A spokesperson for Sequoia has termed the move as a return to the price-control era. However, government sources argue that the funds in question, which come to MFIs via the lending to the priority sector route, are themselves a product of the so-called price-control era. For-profit organisations whose equity commands a respectable premium on the stock market should be able to do without politically directed funds.
There is also some ambiguity over MFIs’ cost of funds and lending rates. The industry association of large MFIs, the Microfinance Institutions Network, has set itself the task of bringing about total transparency in lending rates but this has been work in progress for some time now. There is also some dissonance on what is considered to be benchmark costs and actual rates charged. More than one microfinance veteran has declared that the cost of intermediation for large, well-run MFIs is below 10 per cent at around 7-8 per cent. Hence the microfinance institution Bandhan has reduced its lending rate to 19 per cent. Others are yet to follow suit. It is quite true that no matter how high the lending rates of MFIs are, they will still be far lower than a moneylender’s and hence remain good for poor people to turn to. On the other hand, high lending rates will be justified only if profits are retained at a very high level and used to expand operations. Not only will that be difficult to monitor, high margins will mean high valuations, exits for high capital gains and entry of new investors who may not have the social concerns and motivations of the founders and early investors. The government should not try to micro-manage microfinance, but very high lending rates and profits will not be good for the image of for-profit MFIs.
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