India: Increasing regulations may ‘restrict profitability’ of micro-lenders

The increasing regulations are likely to hit the profitability of microfinance institutions.

Mr Viren H. Mehta, Partner, S. R. Batliboi & Co., said this while delivering the third V. Sitaram Rao Memorial lecture on ‘Metamorphosis of Microfinance Industry’ here on Wednesday.

An interest cap and other regulations might ‘severely restrict profitability’ due to high cost of funds, he said, adding that the long-term prospects for the industry continued to be good.

Other challenges for MFIs would be reduced trust among the customers, decline in bank funding and systemic issues in transparency and corporate governance.

In countries such as Peru, lack of competition from subsidised loans from public sector banks and favourable regulation led to growth of MFI-led financial inclusion, he said.

OPPORTUNITY

Reinventing products and distribution chains might give an impetus to MFIs, Mr Mehta said, suggesting that they could tie-up with the vast network of post-offices for operations. “A post-office is perceived as a much safer agency and its appeal is more in north and north-eastern India,” he added.

There is a ‘huge opportunity’ for micro-lenders in northern States than in the much-penetrated southern markets.

Of the 700 million people in the country who need financial services, only 150 million had access to some sort of credit now, Mr Mehta said.

The proposed Microfinance Bill, if enacted, would create a conducive environment for the growth of the sector, he added.

Mr S. Dilli Raj, Chief Financial Officer, SKS Microfinance Ltd, said one of the causes for the microfinance crisis of 2010 was absence of moderation on the part of some MFIs.

Sitaram Rao was a former chief executive officer of SKS Microfinance Ltd.

SOURCE: The Hindu Business Line

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.

India: Cabinet clears bill to regulate microfinance

From Deccan Herald

The Union Cabinet on Thursday approved a bill to regulate the micro finance industry, postponed decision on retaining FDI ceiling at 25 per cent in the insurance sector, referred the Companies Bill and setting up of an independent Coal Regulatory Authority to the Groups of Ministers.

The bill on microfinance aims to bring the micro lenders under the purview of the Reserve Bank of India.

“It (Micro Financial Sector Development and Regulation Bill, 2011) has also been cleared,” Finance Minister Pranab Mukherjee told reporters after the Cabinet meeting.

The bill, which was drafted in the backdrop of problems faced by borrowers of MFIs in Andhra Pradesh and other states, would now be introduced in Parliament for consideration.

The draft bill, which was circulated for public comments in July last year, had proposed making RBI the regulator for the sector.

As regards the insurance bill, the Parliamentary Standing Committee on Finance, headed by BJP leader Yashwant Sinha, had suggested retaining the Foreign Direct Investment (FDI) ceiling in insurance at 26 per cent.

The government is facing pressure to raise the limit to 49 per cent and had provided for the same in the bill which was tabled in the Rajya Sabha. Informed sources told Deccan Herald that the bill did not come up before the Cabinet for discussion.

Demand for increase

Foreign insurers and their domestic partners have been demanding an increase in the FDI cap to 49 per cent to fund business expansion.

As per the current regulation, a foreign player cannot have more than 26 per cent stake in private insurance companies in the country.

The standing committee had rejected the government’s proposal to raise foreign direct investment ceiling to 49 per cent in December last year saying the proposal to increase the FDI cap in insurance companies seems to have been decided upon “without any sound and objective analysis of the status of the insurance sector following liberalisation”.

India: MFIs want government to walk the talk on Bill

From Business Standard

FINANCIAL REFORMS: Bill likely to supersede the Andhra Pradesh Act, recognise RBI as regulator

It was hardly a surprise, but the introduction of the Micro Finance Institutions (Development and Regulation) Bill, 2012, in the ongoing Budget session of Parliament, has left microlenders optimistic about investors’ confidence returning to the sector.

The plea is the government must walk the talk now and avoid further delay in framing a national microfinance law as the crisis of confidence has reached a nadir.

The Bill, besides recognising RBI as the sole regulator, will define the role and functioning of microfinance companies, remove ambiguity over their legal forms, focus on protection of poor borrowers and tighten monitoring of the sector.

Industry players said the Bill was critical for the revival of the sector as a national microfinance law would supersede the legislation introduced by the Andhra Pradesh government in October, 2010, curbing micro-lending activities in the state.

“We were hoping for this, notwithstanding the heavy legislative agenda the finance minister is steering. While some fiscal concessions for the industry would have been nice. We are still pleased the Bill will be introduced in the Budget session. More than anything, we now want a quick passage of the Bill,” Alok Prasad, chief executive of Microfinance Institutions Network), told Business Standard.

The draft of the Bill was first released in July 2011, inviting feedback from the public and other stakeholders. The inter-ministerial discussions prevented the Bill from being tabled in the winter session of Parliament.

The final draft of the Bill will be a tad different from the one that was released in July 2011, to ensure it conforms to the guidelines released by Reserve Bank of India on non-banking finance company microfinance institution (NBFC-MFI) in December 2011, industry players said.

“It will improve things at the ground level. We can resume operations in Andhra Pradesh once the Bill is passed,” said S Dilliraj, chief financial officer, SKS Microfinance.

India: MFIs hope for bigger equity fund, tax waiver in Budget

By G. Naga Sridhar, The Hindu Business Line

Expansion of microfinance equity fund, exemptions in taxes and tabling of microfinance bill top the wish-list of microfinance institutions in the forthcoming Budget for 2012-13.

“More than anything else, we hope that the Microfinance Bill will be tabled in the Budget session, though it is not part of the Budget,” Mr Alok Prasad, Chief Executive Officer, Microfinance Institutions Network, told Business Line on Friday.

The Microfinance Equity Fund was set up with an announcement in last year’s budget and a corpus of Rs-100 crore has been provided with the Small Industries Development Bank of India.

On the tax front, MFIs were seeking inclusion of NBFC-MFIs in Section 36(1) (viia) of the Income-Tax Act and tax-exemption, according to MFIN.

Level-playing field

“This will give MFIs a level playing field with banks and housing finance companies,” Mr S. Dilli Raj, Chief Financial Officer, SKS Microfinance Ltd, said.

To facilitate build-up of reserves, NBFC-MFIs could be allowed, like housing finance companies and infrastructure companies, tax concessions to the extent of 40 per cent of their profits, he added.

As the low-income group pays a ‘poverty premium’ in the form of service tax on whatever little financial services reach them, NBFC-MFIs should also be included as eligible institutions for remission of service tax on micro-loans and sale of insurance products, Mr Dilli Raj said.

A blanket waiver of stamp duty on all deeds of hypothecation to be executed by microfinance institutions registered with the Reserve Bank of India would also reduce cost of delivery of financial products, feel MFIs.

Indian govt may table micro-finance Bill in upcoming Budget Session in March

From Contify Banking

New Delhi: The Indian government is likely to introduce the Micro Finance Institutions (MFI) Bill in the upcoming Budget Session of Parliament in March, which makes it compulsory for all micro-finance institutions to register with the Reserve Bank of India (RBI) and mandates them to have minimum net-owned funds of Rs 500,000, The Press Trust of India said, citing unidentified officials.

The Finance Ministry has already sent the draft Bill to the Law Ministry for approval, following which it plans to approach the Cabinet, the officials told the news agency.

Earlier, in July, the Ministry of Finance had introduced the draft Micro Finance Institutions (Development and Regulation) Bill, 2011 that proposes to make RBI the sole authority to formulate policy for regulation and development of micro-finance sector in the country and seeks to grant NBFC (non-banking finance companies) status to such companies.

Any MFI which is not a company registered under the Companies Act, 1956, and which becomes a systemically important MFI shall convert its institution into a company registered under the Companies Act, 1956, with or without a license, under Section 25 of the Act, the new draft Bill has recommended.

The draft Bill also proposes that this conversion should take place within six months from the date of the balance sheet, which indicates that the MFI has become a systematically important micro-finance institution in terms of the rules prescribed by the government.

The central bank may also pass an order directing an MFI to stop its operations and refrain from conducting micro-finance activities if found guilty of acting in a manner detrimental to the interest of its customers or depositors.

Also, the RBI will cancel the certificate of registration granted to an MFI if it fails to conform with the directives or conditions, as per the draft Bill.

The ministry also plans to set up the Micro-Finance Development Council to guide the government on policy formulation, schemes and other steps required for balanced growth and development of the sector concerned and micro-finance institutions.

In October, the RBI allowed MFIs to be classified as NBFCs by introducing a new category of financiers: Non-Banking Financial Company-Micro Finance Institutions (NBFC-MFIs).

India: MFI sector needs regulation: HSBC India

By Ramesh S Arunachalam, Moneylife

The government has already drafted the Micro Finance Sector (Development and Regulation) Bill, 2011. The Bill seeks to make it mandatory for all micro finance institutions (MFIs) to be registered with the Reserve Bank of India (RBI). It also entrusts the task of regulating the sector with the RBI

New Delhi: Pitching for early enactment of the Micro Finance Bill, HSBC India chief Naina Lal Kidwai has said the MFI sector has huge potential but needs regulations for growth, reports PTI.

“The MFI sector has a lot of potential. But it needs to have a defined set of rules to function in a proper way… The Micro Finance Bill needs to get cleared at the earliest to achieve this,” Ms Kidwai told PTI.

The government has already drafted the Micro Finance Sector (Development and Regulation) Bill, 2011. The Bill seeks to make it mandatory for all micro finance institutions (MFIs) to be registered with the Reserve Bank of India (RBI). It also entrusts the task of regulating the sector with the RBI.

She said, “The sector should be developed but the interest rates should be checked… it should be seen that there are not many loans given to a single person.”


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India: AP refuses to budge on microfinance legislation

By Dinesh Unnikrishnan, Livemint

The battle over the regulation of India’s Rs.20,000 crore microfinance industry is far from over, with Andhra Pradesh, the largest market for Indian microlenders, remaining firm on retaining its own law on the issue despite a proposed national legislation.

Microfinance institutions (MFIs) extend small loans to the rural poor at higher rates than banks after sourcing money from banks.

The proposal for a national MFI law “doesn’t change the fact that MFIs come under the purview of moneylending activity, and hence, the state law,” Reddy Subramaniam, principal secretary, rural development, Andhra Pradesh government, said on Friday in a telephone interview. “There are a number of judgements from high courts that prove this fact.”

He also said the draft regulation has been formed without consulting the southern state.

On 6 July, the Union government released a draft regulation to govern the sector, making the Reserve Bank of India (RBI) the sole regulator of the microfinance industry. The Microfinance Institutions (Development and Regulation) Bill is expected to supersede all state laws, including the Andhra Pradesh law that has thrown the industry into a crisis.

After a spate of suicides by poor borrowers allegedly driven by coercive loan recovery practices of microlenders, Andhra Pradesh, which accounts for at least one-fourth of the industry, promulgated a state law in October 2010, banning MFIs from collecting weekly repayments and making government approval mandatory for every second loan to a borrower.

But the draft Bill, which has been posted on the Union finance ministry website for public comment, says MFIs registered with RBI won’t be treated as moneylenders, thereby keeping them out of the purview of the Andhra Pradesh Micro Finance Institutions (Regulation of Money Lending) Act, 2010.

“There are constitutional issues needed to be looked into. Parliament cannot normally legislate on a state matter unless it is an exceptional circumstance, which does not arise here,” said Subramaniam.

But a Union finance ministry official, who did not want to be named, said MFIs cannot be categorized as moneylenders as they undertake many other financial activities. The government will take feedback from various stakeholders till end-July and hold another round of discussion with all stakeholders.

“It is possible that we will invite the Andhra Pradesh government for discussions. But we have not decided anything as of now,” said the ministry official.

Andhra Pradesh has given its views on the Bill to the government and is hopeful that necessary changes will be made in the draft, Subramaniam said.

Industry officials said an ongoing litigation between SKS Microfinance Ltd, India’s largest and only listed microlender, and the Andhra Pradesh government on the state legislation, expected to come up for hearing this week, will be crucial in determining the sector’s future.

SKS officials could not be reached for comments.

The impact of the state law is already visible on MFIs’ books.

SKS has seen its loan book contracting to Rs.4,111 crore in March from around Rs.5,000 crore in September last year, with its Andhra Pradesh portfolio declining to about 20% of its loan book from 26% late last year.

The loan book of Bhartiya Samruddhi Finance Ltd (BSFL), an MFI promoted by Vijay Mahajan-led Basix Group, shrunk to Rs.1,117 crore from Rs.1,808 crore in September, when the crisis hit the industry.

The SKS stock lost at least 60% of value between September 2010 and July 2011, but since the draft Bill has been released, it has risen by 56%. The stock closed 2.1% up at Rs.534.55 on Monday on the Bombay Stock Exchange while the benchmark Sensex ended at 18,507.04, down 0.30%.

The collection rates of most of Andhra Pradesh-based MFIs, including SKS and BSFL, fell to around 10% after the state government promulgated the law last year.

At least five MFIs—Trident Microfin Pvt. Ltd, Share Microfin Ltd, Asmitha Microfin Ltd, Spandana Sphoorty Financial Ltd and Future Financial Services Ltd—had to opt for a loan recast to tide over the crisis.

The crisis has a cascading effect in other states, and is already affecting the repayment habits of borrowers, officials said.

“Once the Bill is passed, state governments have to follow that whether they like it or not,” said Kishore Kumar Puli, head of lobby group Microfinance Institutions Network’s Andhra Pradesh chapter and chief executive officer of Trident Microfin. “But at the same time, cooperation of Andhra (Pradesh) government is critical as we have to work with them closely.”

Early this year, RBI issued regulations to govern MFIs operating as non-banking financial companies (NBFCs), based on the recommendations of an expert committee, headed by noted chartered accountant Y.H. Malegam.

It capped the interest rate that MFIs can charge at 26% and made a minimum two-year tenure mandatory for all loans above Rs.15,000.

In an interview with Mint in January, Malegam had said that the panel had held discussions with all stakeholders including Andhra Pradesh government officials to discuss the new rules.

“They said the state government would consider. But obviously, they don’t seem to agree to that. There is nothing we can do in that matter,” Malegam said.

To ensure the participation of stakeholders, the Centre’s draft law has proposed to establish state advisory councils for close coordination between the states and the Centre with regard to the working of the industry.

The fate of the microlending sector is crucial for Indian banks, which have lent at least Rs.14,000 crore to the sector.

“A Central legislation should give more clarity and uniformity to the whole sector, and for the banks in particular. It is preferred compared to state-level legislation,” said Ramnath Pradeep, chairman and managing director of Corporation Bank, which has an exposure of Rs.700 crore to MFIs.

Mathew Titus, executive director at Sa-Dhan, an association of microlenders, said any regulatory environment should take into account the fact that banks are sourcing money from the public.

“We have to recognize that the funds, which are flowing from banks are depositors’ money. So any regulatory environment that comes in needs to take into account that fact. A uniform regulation at national level is desirable,” Titus said.

The stand of Andhra Pradesh government assumes significance in the backdrop of the state’s plan to set up its own NBFC with the participation of state-run banks. This NBFC will lend to federation of self-help groups and will have reach to around 10 million borrowers in the state. Industry officials say this will pose a direct threat to the existing companies and can kill the competition in market.

“The state is contracting its own stand on the matter. On one side, it wants to stop commercialization in the industry, but on the other side, it is floating a commercial vehicle in the form of NBFC,” Puli of Trident, said.

According to Subramaniam, the proposed entity will lend at 15% or below to poor borrowers whereas other microlenders lend at a minimum 26%.

Remya Nair in New Delhi contributed to this report.

India: Andhra MFIs get breather

By Prashanth Chintala, Business Standard

The provisions of the draft Microfinance Institutions (Development and Regulation) Bill, released by the Centre, seeking public comments, seems to have come as a big relief to the beleaguered microfinance institutions (MFIs) in Andhra Pradesh (AP).

“It is hugely positive for the MFI sector,” Dilli Raj, chief financial officer of SKS Microfinance, the only listed MFI in the country, told Business Standard.

He said the draft legislation provided for exempting MFIs from the Money Lending Act and various other state-level legislation and “now we are waiting for its enactment”.

The operations of MFIs in AP, which earlier accounted for nearly 40 per cent of the industry’s activity, have been drastically affected since the state enacted the AP Microfinance Institutions (Regulation of Money Lending) Act last year.

Following the new legislation, the total disbursements of MFIs in the state have declined from Rs 5,035 crore in the first half of 2010-11 to just Rs 8.5 crore in the second.

According to Basix Founder and Microfinance Institutions Network (MFIN) President Vijay Mahajan, currently there are 9.2 million borrowers in the state who did not repay MFIs. The default amount is as much as Rs 7,200 crore, crippling the operations of the entire sector.

Against this backdrop, the draft Bill, which proposed to empower the Reserve Bank of India to regulate the activities of all MFIs, was generally welcomed by the industry.

“We welcome it on behalf of the whole sector,” Mahajan said adding the best part of the draft Bill was that it clarified the regulatory road map for the future and had a new generation architecture both at the state and national level.

He said that the draft provided for three layers of consumer protection and safeguarded the interests of both lenders and borrowers. “I think it is a good, progressive and forward looking document,” chief executive officer of MFIN, Alok Prasad, said.

Prasad was a member of the Bill’s drafting committee.

Sa-Dhan, an association of 251 community development finance institutions that had been part of the drafting committee, said the Bill would reinforce the sense of legitimacy of microfinance operations.

“It provides helpful measures for client protection and a direction to the microfinance industry to perform its roles with efficiency and effectiveness,” Sa-Dhan executive director, Mathew Titus, stated.

New draft of MFI Bill to give more teeth to RBI

By Dinesh Unnikrishnan, Livemint

Mumbai: The proposed microfinance Bill for governing India’s Rs. 22,000 crore microlending industry is set to give more teeth to the Reserve Bank of India (RBI) to regulate larger microfinance institutions (MFIs). This will be done by removing such entities from the purview of laws enacted by state governments such as the recent Andhra Pradesh Act.

The Union government last week appointed a committee under financial services joint secretary K.V. Eapen to redraft the Bill factoring in the current realities in the microfinance industry and the recommendations of the Malegam panel, appointed by RBI. The panel had suggested the creation of a new category of non-banking financial company MFIs, or NBFC-MFIs.

In keeping with the recommendations of the Malegam panel, the Bill will focus more on borrowers and strengthen the hands of RBI to regulate MFIs by way of clearly defining such institutions, according to two members of the panel.

Both of them declined to be identified because they are not supposed to talk to media until the committee redrafts the Bill.

More importantly, the modified Bill is expected to cover the entire microfinance sector, including the larger entities.

The earlier draft covered only non-NBFC MFIs incorporated as trusts and non-governmental organizations that constitute a very small part of the total industry. It also envisaged National Bank for Agriculture and Rural Development (Nabard) as the regulator for smaller MFIs.

The proposed microfinance Bill assumes significance as it is expected to resolve the regulatory uncertainty in the ailing Indian microlending sector by providing a clear framework. Most banks have stopped giving fresh loans to MFIs due to this uncertainty.

Top officials from RBI, Nabard and microfinance industry associations are members of the committee headed by Eapen.

The committee is expected to submit the modified Bill to the government by the end of April and this will be tabled in Parliament in the monsoon session, according to members of the panel.

“There is a complete clarity that it (microfinance sector) will come outside the purview of state governments. The new microfinance Bill will categorically say that microfinance is a properly defined financial service and not moneylending,” one of the two members said.

“Through a process of clarifying things, the Bill will strengthen the hands of RBI with respect to MFI regulation,” this person added.

So far, moneylending is treated as a state subject and, hence, a state has the powers to control MFIs. Exercising this power, the Andhra Pradesh government passed the Andhra Pradesh Micro Finance Institutions (Regulation of Money Lending) Act, 2010.

The Act defined an MFI as any person or entity “in whichever manner formed and by whatever name called, whose principal or incidental activity is to lend money or offer financial support of whatsoever nature to the low-income population”.

“The committee has been formed to quickly redraft the Bill so that it can be presented at the monsoon session of Parliament. We do have the Malegam recommendations before us. The microfinance sector has evolved from the past and is on a different scale now. Hence, the need for new regulation,” a second member of the government panel said.

MFIs are in the business of giving tiny loans to low-income borrowers. They typically charge their borrowers 24-32% and raise money from banks at 9-12%.

More than a quarter of India’s microfinance industry is concentrated in the southern state of Andhra Pradesh, which is home to some of the leading Indian MFIs such as SKS Microfinance Ltd, Share Microfin Ltd and Asmitha Microfin Ltd.

MFIs plunged into a crisis in mid-October following a state law by the Andhra Pradesh government to check alleged coercive recovery practices of some microlenders.

The law created an uproar among MFIs after it prohibited them from collecting dues on a weekly basis and instead asking them to do so once a month. It also made it mandatory for them to secure government approval for every second loan issued to the same borrower.

MFIs’ loan collection rates dropped to 10-20% in Andhra Pradesh and they virtually stopped issuing new loans.

This, in turn, prompted banks to stop fresh lending to MFIs.

In October, RBI appointed the Malegam panel, which suggested, among other things, capping the interest rates charged by MFIs at 24% and their margins at 10-12%.

Senior executives in the microfinance industry said the Central legislation is expected to put an end to the crisis.

“Today, all of us (MFIs) are worried about the political risk and regulatory uncertainty looming over the microfinance industry. The proposed Bill is expected to solve these issues by giving a single regulatory framework,” Raja Vaidyanathan, chairman and managing director of Asirvad Microfinance Pvt. Ltd, said.

Chennai-based Asirvad has a loan book of Rs. 115 crore and 230,000 borrowers.

dinesh.n@livemint.com

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