Cheaper funding sources can help reduce microfin int rates

Amid sharp criticism over high interest rates, India's microfinance veterans have said that cheaper sources of funding can further bring down the rates charged by microfinance institutions.

"Interest rates are an issue that concerns the entire industry, which is subject to combination of issues like scale, cost of availability of funds and market forces," Vijay Mahajan, president of the Microfinance Institutions Network that represents 44 leading microfinance lenders, told PTI.

Mahajan, who is associated with rural economic development for nearly three decades and also heads the microfinance institution Basix, further added that the high cost of funds available to the MFIs was one of the major problem in the microfinance sector.

The loan book size of domestic MFIs, which cater to about 2.7 crore poor people, is about Rs 33,000 crore. MFIs extend loans in rural areas, mainly unbanked areas.

"As MFIs, we have always stated that the growth of the base (of customers) will be critical to the reduction of costs. In addition, we can reduce costs if cheaper source of funds are made available to us," he said.

Sajeev Viswanathan, CEO of Bharatiya Samruddhi Finance, a microfinance firm promoted by Basix, said, " Yes, it is possible to reduce it (interest rates). One way to reduce it is by reducing the operating costs, and second way is banks reducing their interest (rates charged) from MFIs."

Microfinance players raise funds through various sources including equity, term loans from banks/financial institutions, securitisation, rated securitisation, non- -convertible debentures and commercial paper.

Out of the Rs 33,000 crore loan book size, about Rs 5,000-Rs 6,000 crore comes from private equity, capital market while around Rs 27,000 crore comes from banks, which is the only sustainable souce of funding, Viswanathan said.

In September, the finance ministry had asked state-owned banks to ask MFIs to cap their lending rates in the range of 20-24 per cent as a precondition to access bank finance.

Leading industry player SKS Microfinance recently said it would reduce interest rates across states to 24 per cent.

Earlier this month, the top five microfinance companies including SKS Microfinance, Basix, Spandana, Share Microfin and Asmitha Microfin agreed to reduce interest rates they charge from borrowers to 24 per cent.

"If all the stakeholders like the government, bankers, the regulator and key decision makers realise the importance of financial inclusion which can be achieved only by a robust micro finance industry we believe the microfinance industry has a very bright future," Mahajan added.