RBI guidelines on MFI sector positive: Crisil

The Reserve Bank of India's (RBI) recent guidelines on the MFI sector will prove to be a positive and structurally strengthen it over the long run, ratings agency Crisil today said.

"RBI's revision in provisioning norms and change in recognition of non-performing assets [to 90 days overdue from 180 days overdue] is unlikely to impact the profitability of the non-Andhra operations of Crisil-rated MFIs over the medium term," Crisil said in a study on the sector.

The RBI's recent guidelines have created a new category of non-banking financial companies (NBFCs) called NBFC-MFIs. The guidelines also highlight the need for transparency in interest rates, and address issues on multiple lending and coercive recovery.

Key changes in the guidelines include revised provisioning norms and asset classification for NBFC-MFIs; relaxation in the minimum requirement for net owned funds, and in the minimum capital adequacy ratio requirement for 2011-12 for MFIs (micro-finance institutions) with sizeable exposure to Andhra Pradesh.

Crisil said that a year after the Andhra Pradesh government promulgated its ordinance for MFIs, leading to a major upheaval in the sector, the MFI players are redesigning their business models.

Driven by moderation in growth, decline in profitability and subdued funding prospects in their core business, several MFIs are starting new ventures that are focused on secured asset classes or leveraging their branch networks to offer other retail products, it said.

"While most of these new business initiatives are at an early stage, MFIs' ability to develop systems and processes, and scale up operations will shape their business risk profiles," Crisil Director Nagarajan Narasimhan said.

The MFI sector's growth and profitability prospects have moderated since implementation of the Andhra ordinance, because of the subdued funding environment and operating challenges associated with regulatory restrictions on multiple lending, loan size, and end-use of loans.

While there has been some regulatory clarity and selective lending by banks in the last few months, funding to the sector has not picked up. Crisil-rated MFIs have raised Rs 50,000 crore from banks and alternate sources in 2011-12 much lower than the pre- ordinance levels, it said.

MFIs are, therefore, diversifying their business models by starting new ventures aimed at entering other asset classes mostly secured, such as loans against gold jewellery, housing and vehicle financing loans, Crisil said.

Some MFIs have moderated their growth plans, while others have opted to leverage their branch network to offer retail products, it added.