India: Microfinance institutions struggle for funds as banks raise lending rates
By Biswarup Gooptu & Deepika Amirapu, Economic Times
BANGALORE/HYDERABAD: Microfinance companies, especially the small and mid-sized micro-lenders, are expected to struggle to access money for lending even if the regulatory environment clears up, industry participants and observers say.
The main impediment will be banks’ reluctance to fund microfinance companies even after a proposed microfinance law comes into effect. Catering mainly to those at the bottom of the pyramid, microfinance providers rely heavily on banks for money which they lend at interest rates ranging between 24% and 36%.
Banks have steadily raised their lending rates to microfinance firms from 9%-12% earlier to 15%-18% now, making loans to small borrowers costlier. The ones likely to be most affected by higher bank lending rates will be small and mid-sized microfinance companies with loan portfolios between Rs 50-crore and Rs 250-crore.
“We have to wait and watch what is happening to the small and mid-tier players. The Bill will also force some amount of consolidation because banks are not comfortable in lending to small players,” Padmaja Reddy, managing director of Hyderabad-based MFI Spandana Spoorthy.
Banks have adopted an increasingly cautious approach towards the microfinance sector, and have preferred to lend money only to the marquee names that already have large equity base, such as Ujjivan and Equitas.
The Micro Finance Institutions (Development and Regulation) Bill, 2012, proposes an interest rate cap of 26% for microfinance institutions, with a margin cap of 10% above the cost of funds for players with loan portfolios exceeding Rs 100-crore, and 12% for smaller ones.
The Bill gives the Reserve Bank of India-the regulator for the sector–sweeping powers to control lending rates and margins, apart from fixing prudential norms. A microfinance development council, one of two advisory bodies proposed to be set up under the Bill, will set the policy agenda.
“It will turn out to be a loss-making business. If greater liquidity does not flow in over the next 12-18 months, we could see a number of the smaller microfinance companies disappear,” observed Venky Natarajan, managing partner of Delhi-based impact investment firm Lok Capital.
Turning to the risk capital industry is also not a viable option, he said.
“Equity cannot replace debt, and should not as well, simply because the risk-return characteristics are very different,” he said. Lok Capital has invested around $25 million (Rs 140-crore) in microfinance providers such as Ujjivan Financial Services, Janalakshmi, Satin Creditcare and Basix.
The Indian microfinance sector has been in a crisis since late 2010, when Andhra Pradesh, the hub for microfinance in India, imposed tight regulations on microfinance firms citing usurious interest rates and the use of coercion to recover loans.
SKS Microfinance, one the country’s largest, and the only listed microfinance company, bore the brunt of the fallout.
The microfinance company has been forced to write off nearly Rs 1,500 crore in loans over the past six quarters, and its stock, which traded at Rs 1,021 in October 2010, is now hovering at around Rs 65, having lost more than 90% of its value since the Andhra Pradesh crisis
The sector has seen some recovery in 2012, but it has been a skewed one. Larger companies have continued to successfully raise funds, with Bangalore-based Ujjivan having raised a $35 million so far this year.
“Larger players can survive and perhaps return to profitability in three to six months, but, frankly, I don’t see how the other smaller ones can survive,” said Dilli Raj, chief financial officer of SKS Microfinance.