Crisil sees consolidation in MFI sector

Crisil Ratings has said the microfinance institutions (MFIs) sector is likely to see consolidation over the medium term, since small players may find it difficult to operate in a strict regulatory environment.

“The MFI sector’s growth is likely to remain subdued over the medium term, especially in regions with high micro finance penetration, owing to the proposed regulatory restrictions on multiple lending, loan size and end usage of loans. This would provide an impetus for consolidation in the sector,” said Rupali Shanker, head, Crisil Ratings. However, Crisil said the new regulatory norms would ease pressure on the profitability of large microfinance institutions (MFIs) and ensure the revival of banks’ advances to the sector.

The Reserve Bank of India (RBI) had, last week, said it had accepted the broad framework of regulations recommended by the Malegam committee, albeit with some modifications. The committee was formed to study the concerns of the microfinance sector.

Under the new rules, banks’ lending to MFIs would be classified under priority sector advances if micro lenders cap their margins at 12 per cent and interest rates at 26 per cent. RBI said loans to borrowers should not exceed Rs 50,000 and for a loan amount in excess of Rs 15,000, the repayment period should not be less than 24 months and without pre-payment penalties. MFIs are allowed to give loans without collateral and the aggregate amount of loans given for income generation should not be less than 75 per cent of the total advances of the micro lender.

Crisil said while RBI’s move may revive the flow of bank credit to the sector, uncertainties remain over the MFI sector’s regulatory agency.

“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. A clearer regulatory framework will remain critical to instilling greater confidence in the sector,” said Pawan Agrawal, director, Crisil Ratings.

Micro lenders, which typically lend to poor borrowers in villages, have been battling a crisis of confidence for the past six months after it was found they charged a high rate of interest and used coercive methods for loan recoveries.

The state government of Andhra Pradesh, which accounts for nearly one-third of the sector’s business in India, introduced an ordinance in October which, among several other restrictions, banned the weekly re-payment of dues which affected MFIs’ loan recoveries in the state. MFIs said the new ordinance affected their profitability and led to concerns over banks’ loans to the sector turning into non-performing assets.