Andhra govt seeks bar on MFIs tapping markets, private equity

Need to cap interest rates, govt tells Malegam committee.

The Andhra Pradesh government on Thursday requested the Y H Malegam committee to bar microfinance institutions (MFIs) from raising funds from stock markets and private equity (PE) players.

Submitting a report to the committee, set up by the Reserve Bank of India (RBI) to look into the issues facing the microfinance sector, the government advocated capping of interest rates charged by MFIs.

The requests, if they find favour with the committee, may spell disaster for some MFIs planning to tap capital markets or PE players for funds.

The report said the facility had opened gates for investment in the sector. “These PEs are not social investors and, therefore, drive MFIs to earn more profits for them, defeating the very purpose of financial inclusion,” said the report.

“There is a need to promote social investors, as also rope in companies evincing interest in corporate social restructuring. MFIs should not be allowed to go for initial public offers, as they have to generate more and more profits, defeating the very purpose of microfinance,” the government requested the RBI committee.

It said the present crisis in the sector had emerged because Sidbi and other banks lent money to MFIs without monitoring their activities. “There has been widespread violation of RBI’s guidelines issued to banks in the letter dated November 22, 2006. This calls for a detailed investigation,” said the report.

On MFI interest rates, it said the government had been regulating the rates charged by money lenders and so there was no reason why MFI rates should not be regulated.

“We propose that a cap of eight per cent on the interest rate spread be imposed on interest rates charged by MFIs. This cap is best imposed by state governments, which have the machinery to verify the situation on the field,” the report stated.

The Andhra government also believes the return on assets (RoAs) of MFIs is in the range of four-five per cent, which is considered very high. Therefore, there is a need to rationalise that in line with other financial institutions.

The Andhra government said there was no transparency in the rates charged by MFIs. “MFIs have resorted to various deviant practices in the form of charging very high effective rates, collection of upfront charges, processing charges, collection of interest-free security deposits, lack of transparency in insurance, among others,” the government said.

The report said the poor had become an object of profit, a business opportunity, for MFIs. Loan-with-no-questions-asked have been pumped into the system after taking individual promissory notes. This was a violation of RBI’s guideline of group guarantee, it added.