L&T Finance to register microfinance arm

While most non-banking finance corporations (NBFCs) continue to shy away from the micro-lending business, L&T Finance is ready to take the leap and expand its microfinance operations.

The financial services company now plans to register its new microfinance subsidiary, L&T Unnati, with the Reserve Bank of India (RBI) as an NBFC-MFI, a senior official of the company told Business Standard. According to recent RBI guidelines, NBFCs that do not qualify as NBFC-MFIs will not be allowed to lend more than 10 per cent of total assets to the sector.

While L&T Finance currently has only 2.5 per cent of its loans in the microfinance sector, it plans to expand this business. Hence, it plans to register Unnati as an NBFC-MFI. norms.

"We have already incorporated L&T Unnati and will be looking to register it with the RBI. After registration, we will transfer the good books on to the registered company and then run the MFI business through it," said N Sivaraman, president, L&T Finance Holdings.

The microfinance industry has been hit by a crisis since October 2010, when the government of Andhra Pradesh - the state was the largest market for micro lenders in the country at the time - introduced a new law stopping microfinance firms from recovering dues on a weekly basis and to expand their business by offering fresh loans. The state government's actions came after it was alleged these lenders charged exorbitant rates of interest to poor borrowers and used coercive methods to recover dues.

L&T Finance currently has around Rs 350 crore of loans in the sector. Around Rs 160 crore were given outside Andhra Pradesh and are still considered a performing portfolio. The total loan book of L&T Finance was Rs 13,800 crore as of December-end.

The company feels once regulations are in place, the micro lending business will be a big source of business. "We believe there is a great demand for this business, as this is one of the largest sector if we take the credit demand into consideration. Thus, we are neither expanding aggressively nor pulling out completely," said Sivaraman.

On regulations that may be introduced in the coming quarters, Sivaraman said, "Depending on the regulations that may unfold, we will be taking a call whether to expand this business." As of now, we are expecting some more regulations to be announced by the RBI, he added.