Priority tag may ease liquidity crunch for MFIs: Crisil

Ratings Agency Crisil today said microfinance industry could see market consolidation due to pressure on operating margins, even as the RBI's decision to allow it priority status in securing bank loans would help ease liquidity problems.

The MFIs are facing liquidity crunch on banks' reluctance to provide them loans after a strict legislation in Andhra Pradesh, their main market that accounts for about 25% of their business, hemmed their operations and negatively impacted their revenue.

However, the RBI's monetary policy announced last week would encourage banks to advance loans to them.

"Growth prospects for microfinance institutions (MFIs) will remain subdued over the medium term. Operating challenges coupled with expected difficulty in raising capital, are likely to trigger consolidation in the sector," Crisil said in a statement.

However, the agency said the priority sector status accorded to the bank loans to MFIs would be positive for the sector.

"Crisil expects RBI's recent guidelines to provide cushion to MFIs' profitability and enable resumption of bank funding to MFIs," Crisil Ratings Head Rupali Shanker said.

The Reserve Bank in its monetary policy statement last week had said that the loan by the banks to MFIs for lending to small borrowers will fall under 'priority sector' category. It has further capped interest rates charged by MFIs from small borrowers at 26%.

The report said that to comply with the new regulations, MFIs will have to enhance their internal systems, strengthen their monitoring mechanisms and invest in training employees.

"The MFI sector's growth is likely to remain subdued over the medium term, especially in regions with high MFI penetration, because of proposed regulatory restrictions on multiple lending, loan size and end-usage of loans. This will provide an impetus for consolidation in the sector," Shanker added.

The report said that financial risk profiles of MFIs with significant exposure in Andhra Pradesh are likely to remain under considerable stress because of low collection rates.

"Substantial improvement in recovery rates and timely restructuring of these MFIs' bank loans will be critical for their survival," it said.

Crisil, however, said that the sector still lags a clear regulatory jurisdiction, which is essential for instilling greater confidence in the sector.

"Regulatory jurisdiction for MFIs remains unclear. While RBI has created a new category of non-banking financial companies to regulate the MFI sector, multiple regulators continue to oversee the sector," Crisil Ratings Director Pawan Agrawal said.