Microfin entities may come under tighther regulations: report

Microfinance institutions in the country may be subject to stricter regulations considering the "socio-political sensitivity" involved in rural lending activities, says a brokerage house report.

At a time when the government is looking at ways to increase rural lending, microfinance institutions (MFIs) have attracted criticism from various quarters for charging high interest rates on loans.

In a report on MFIs, domestic brokerage Indiabulls Securities said the "the business of MFIs is likely to come under regulatory or judicial intervention considering the socio-political sensitivity to rural lending."
    
This trend has already been seen in Andhra Pradesh and Kerala where governments have mandated NBFCs and MFIs to register under local money-lending laws, which means that the government has the right to cap or monitor the interest rates charged to borrowers.
    
The report, done by two analysts Saikiran Pulavarthi and Deepak Agrawal, comes at a time when the government is of the view that MFIs should not lend funds at usurious rates and the Finance Ministry has asked public sector banks to ensure that these institutions do not charge a loan rate of above 24 per cent.
    
Compared to urban lending, MFI lending rates in the rural areas are much higher.
    
If MFI lending grows on a mass scale, one would have to wait to see how the local leadership views the popularity of such lendings and the lenders, the report said.
    
Analysts are of view that considerable socio-political sensitivity can be associated with lending at high interest rates to the poor.
    
"The entry of an 'apolitical' Messiah providing cheap loans will have ramifications (threat of erosion of vote banks, dilution of leadership of the panchayats, zamindars, etc). In such a scenario, MFIs will face instant ostracisation due to obvious reasons," Pulavarthi said.
    
"Also, farm loan waivers have always been a vote-bank tool. We have seen such instances occurring in Karnataka last year. Any similar moves of this kind could hamper the business of MFIs," the report said.
    
The number of MFIs has increased manifold in the last few years and therefore analysts believe the risk of multiple MFI lending to same individual is pretty high going forward.
    
Since microfinanciers take loans from banks and lend it to customers at rates as high as 36 per cent, the government is now insisting that public sector lenders should ask MFIs to cap their lending rates in the range of 20-24 per cent as a pre-condition to access bank finance.

On its comment over SKS Microfinance, the only listed MFI in the country, Indiabulls analysts said they believe that the execution risk on a pan-India basis is quite high.
    
SKS's loan book is primarily concentrated in five states, which contribute 71 per cent of total loans.
    
"The new states where SKS is now expanding offer great opportunity; however that comes with high execution risk, especially because consumer behaviour, social and religious dynamics are different from region to region, and competition is already strong in states where SKS will enter," they added.