Crisil: Malegam panel proposals will lead to MFI consolidation

The Malegam committee report on the microfinance institutions (MFI), if implemented, will lead to consolidation in the sector as higher capital norms will raise the entry barrier and at the same time smaller players will find it difficult to raise capital, ratings agency Crisil said today.

The committee, which was set up by the Reserve Bank of India, after controversy broke out in the micro finance sector in October has suggested, among other things, capping of high interest rate and minimum networth of Rs 15 crore. At present, MFIs, which are registered as non-banking financial company (NBFC) are required to have minimum capital of Rs 2 crore.

Viewing the Malegam recommendations as a positive step towards enhancing shareholders confidence in microfinance institutions, Crisil said, “The recommendations, once implemented, will pose additional operating and compliance-related challenges for the MFI sector. The sector’s growth prospects and profitability will weaken, thereby leading to a possible consolidation in the industry.”

The rating major expects the decline in the gross interest spreads of the top five MFIs is expected to be in the range of 5 to 8 per cent, over the medium term.

MFIs with stronger internal processes, higher focus on transparency and governance, and efficient operations will reap the maximum benefits, Crisil said.

RBI, which made the committee’s recommendations public yesterday, will act as the central regulator for MFIs and a separate category among the NBFC class will be created, namely, NBFC-MFI.

Crisil says certain recommendations the Malegam committee are expected to pose additional operating challenges for the MFI sector over the medium term. “MFIs will have to enhance the robustness of their internal systems and processes, strengthen their monitoring mechanisms, and invest in training their employees.

The growth prospects of the MFI sector will remain subdued, especially in regions with high penetration of MFIs, because of restrictions on multiple lending, loan size, and end-usage of loans. The sector’s overall profitability is expected to weaken because of the proposed interest rate cap on individual loans and margin cap on an overall basis, it said.

According to Crisil, the funding for the MFI sector is expected to revive gradually with increase in lenders’ confidence and the temporary relaxation of the restructuring guidelines by RBI will also provide liquidity relief.

“In addition, the continuation of priority lending status for loans originated by NBFC-MFIs will ensure sustained availability of bank funding for the MFIs over the medium to long term,” Crisil added. (End)