'Merger of small MFIs will help ailing sector'

The consolidation — mergers and acquisition — of small microfinance institutions (MFIs) struggling to raise money would help address the problems of the ailing sector, said Reserve Bank of India (RBI) deputy governor, K C Chakrabarty.

The sector, struggling with high non-performing assets (NPAs), should consider mergers for increasing its creditworthiness. Small lenders should come together if they want to secure funds with ease. “Then they (MFIs) should become big....They should merge”, Chakrabarty told reporters on the sidelines of an event organised by Central Bank of India.

The apex bank brought MFIs under its direct supervision by creating a separate category of MFIs —non-banking financial company MFIs. The new guidelines prescribe stringent provisioning and lending norms.

While large entities are in some way able to raise funds, smaller ones are on the verge of closing, as their sources of funding have dried.

Though Chakrabarty suggested a way out for small MFIs to sustain their business, he said those with a good credit history continue to receive funding from banks. “There are enough MFIs taking money and paying it back. These are getting the money,” he said.

However, despite the new regulations, Chakrabarty said banks needed to be cautious in lending to the sector. “Banks need to be selective. If they feel the borrower is capable of paying back, they would lend,” he said.

Banks reiterated the views expressed by the regulator. “Consolidation of MFIs would be a step in the right direction, as it helps increase their capital base. Also, it would lead to healthy competition between big MFIs and definitely better regulation and management of the sector,” said A S Bhattacharya, chairman and managing director, Bank of Maharashtra. Another senior official of a public sector bank said banks were taking into account the capital base, regions of operation and activities of MFIs before lending.

Credit rating agencies also feel bringing together small and scattered micro lenders would help in changing the perception of lenders towards the sector. “Consolidation would help in diversifying risks and increasing the loss absorption capacity of MFIs. The advantages of large-scale operations can also be leveraged for raising funds,” said Naresh Takkar, managing director, ICRA.

Yesterday, RBI had allowed MFIs to raise up to $10 million through external commercial borrowings.