RBI norms on loans not to hit MFIs' profitability: Icra

The Reserve Bank's guidelines related to classification of bank loans to NBFC-MFIs under priority sector are unlikely to have a major impact on micro-finance institutions' profitability, rating agency Icra said today.
Last week, the central bank had said banks have to ensure MFIs comply with prescribed cap on individual loans and margin in order to be eligible to classify these loans under priority sector.
The interest rate cap will be the average of the base rates of the five largest commercial banks by assets multiplied by 2.75, or the cost of funds plus margin cap, whichever is lower. The average of the base rates will be advised by the RBI later.

The interest margin for large MFIs (over Rs 1 billion portfolio outstanding) has been capped at 10 per cent as against 12 per cent for 2013-14.
"With most NBFCs-MFIs lending at an interest spread of 10 per cent or lower, the proposed reduction in interest spread is unlikely to have a significant impact on their profitability," Icra said in a report here.
The operating expenses of MFIs vary between 4.5 per cent and 15 per cent, with the median at 9.5 per cent.

"MFIs with lower operating expenses would be in a better position to maintain operating efficiency as the net interest income would remain restricted and opportunities for fee income are limited," the report said.

The revised interest rate cap could allow a median MFI to report a return on net worth (ROE) of 10.5-12.5 per cent.
"ROE would have to be improved via rationalisation of expenses so that MFIs are able to attract equity for growth."
According to the report, NBFC-MFIs would need Rs 40-55 billion in equity to fund a 40-50 per cent growth over the next three years. With the RBI-advised base rate at 9.75-10 per cent, the cap on lending yields would be 27-27.5 per cent.
MFIs would have to lend at this rate, or at the cost of funds plus margin cap, whichever is lower. The cost of funds for most MFIs has been in the range of 13-15 per cent, with the median at 14.5 per cent.

The base rate-driven cap would be applicable for mid- and small-sized MFIs. "Therefore, this change too is unlikely to impact the large MFIs, even as it could affect the smaller players who may be lending at higher yields," it said.