India: Microfinance defaulters may find it tough to get fresh loans

By Shobha Roy, The Hindu Business Line

A defaulter or overleveraged borrower might find it difficult to get credit from microfinance institutions (MFIs).

With almost all NBFC-MFIs sharing nearly 100 per cent of the borrowers’ credit history with credit bureaus, borrowers will find it difficult to approach them for loans.

Following the crisis in the MFI industry in Andhra Pradesh, the Reserve Bank of India had, in September last year, asked all NBFC-MFIs to upload the data of their clients with any of the four credit bureaus including Cibil, Experian, Equifax and High Mark.

According to Alok Prasad, Chief Executive Officer, Microfinance Institutions Network (MFIN), close to 75 million client records have been uploaded with the two credit bureaus — Equifax and High Mark Credit Information Services Ltd.

“The first step is where the MFIs provide a data of their clients to credit bureaus; the next step is where they can take reports on specific clients to get their borrowing and repayment record. Both these steps are being followed by MFIs,” Prasad told Business Line.

There are close to 25 million borrowers in the industry.

“The higher number of records with credit bureaus is primarily because a borrower might have taken more than one loan. Some of them might not be taking credit at present but records still exist,” said Chandra Shekhar Ghosh, Founder and Chairman of Bandhan.

RBI, in its guidelines to NBFC-MFIs, had instructed that a self-help group cannot borrow from more than two MFIs and the total borrowing should not exceed Rs 50,000.

“Multiple lending and over leveraging were the two key issues that came to light following the crisis. This has been largely put in check as our lending decisions are based on the credit report,” said Shubhankar Sengupta, Chief Executive Officer, Arohan Financial Services.
Slow disbursements

Though MFIs are currently uploading monthly credit record with the bureaus, they will soon start feeding fortnightly data as well to make the system more effective, Prasad said.

The new system has, however, delayed the disbursement process a bit.

“Earlier, disbursements were made within a week but now it takes about two weeks to consult the records and take a decision,” Ghosh said.

India: MFIs seek time till 2015 to cut margin cap

By Rohit Khanna, The Financial Express

Kolkata: The microfinance industry has sought time till 2015 to adhere to the 10% margin cap imposed on large lenders. The Reserve Bank of India had put a cap of 10% on microfinance institutions in an August 3 circular.

Microfinance institutions in the country function on an average operational cost ranging between 12% and 14%. While the MFIs have gradually brought down operational costs by 50% in last two years, the apex bank feels costs can be brought down further, especially for those with a portfolio size of more than R100 crore. Total loan portfolio of 41 MFIs as on June, 2012 was pegged at R17,154 crore. Members and representatives of microfinance institutions met RBI deputy governor Anand Sinha a fortnight ago.

The apex bank has brought down margin cap for microfinance institutions with a portfolio over R100 crore to 10% from 12% earlier, while keeping the margin cap for institutions with lower than R100 crore portfolio at 12%. As on June 2012, there were 21 MFIs in the country with a portfolio size of more than R100 crore.

Operational cost for the MFIs consists of three main factors — personal cost, administrative cost and provisioning cost. Personal cost contributes to around two thirds of the operational cost while administrative cost and provisioning costs constitute the rest.

“We need time at least till 2015 if we have to bring it down finally,” said Chandrashekhar Ghosh, founder and mentor of Bandhan. “Operational cost can be brought down if loan size is increased. But with a larger loan size risks towards creation of bad assets also increase,” Ghosh said. Bandhan has one of the lowest operational costs in the microfinance industry. “We have to keep strong supervision in order to track repayments and that requires men deployed on the field,” he said. The 41 microfinance institutions in the country employ around 65,000.

According to Subhankar Sengupta, the managing director of Arohan Financial Sevices, greater equity infusion into MFIs can help in bringing down debt and improve margins of the MFIs.

India: MF interest rates – PMEAC talks tough

Criticises strong-arm collection tactics

After the Reserve Bank of India (RBI) tightened the noose on India’s micro-finance institutions (MFIs), it is now the turn of the Prime Minister’s Economic Advisory Council (PMEAC), which on Wednesday said that MFIs must work within a stringent regulatory mechanism.

“There should be a limit on interest charged on borrowers and a format for providing loans,” PMEAC Chairman C Rangarajan said.

MFI growth in India has been remarkable in the past five years in the wake of most formal financial institutions showing reluctance to serve the poor and micro-enterprises due to the prevalence of repayment risks.

In 2009, there were about 27.5 million borrowers and 84 MFIs, with an estimated portfolio of $4 billion, according of official data, which says, the annual growth over the last five years has been 62 per cent in terms of clients and 88 per cent in terms of MFI portfolios.

While, the RBI has acknowledged that the role of MFIs is important as they facilitate financial inclusion, there is a raging controversy over their anti-poor activities, with the charges against them involving usurious interest rates and strong-arm collection tactics employed by some MFIs.

Concerned over the problems of multiple lending, Rangarajan also said that MFIs should discourage multiple loans to same borrowers. Two or more loans by the same household from a single source is referred to as multiple borrowing.

Multiple borrowing has emerged as a major cause for concern as it is usually taken by the small borrower to pay off the existing debt, which in fact creates a vicious cycle of debt for the borrower.

“Strong-arm tactics adopted in recovering loan repayments have evoked much resentment. Equally, the business models adopted by many large MFIs were wrong.

Multiple loans to borrowers for non-productive activities are a self-defeating exercise,” the PMEAC chief said.

According to him, the overall cost to borrowers must be maintained at a level consistent with the repaying capacity of borrowers.

Following the Malegam Committee recommendations in the aftermath of the Andhra microfinance fiasco, the RBI had bunched together the microfinance sector as a niche segment within the category of non-banking financial companies and brought them under its direct regulation.

It had also set strict lending norms for the sector and asked them to start provisioning for defaults. Under the new rules, MFIs are not allowed to lend at more than 26 per cent interest, and margins on borrowed funds cannot exceed 12 per cent.

Also, not more than two MFIs should lend to the same borrower, while one borrower should not be a member of two groups simultaneously.

The frequency of repayment instalments should be decided by the borrower.

SOURCE: Deccan Herald

India: Financial inclusion – India scores poorly on global stage

India had scored poorly on financial inclusion parameters when compared with the global average, said the Reserve Bank of India in its annual report.

The report quoted a World Bank study in April 2012, which had shown half of the world’s population held accounts with formal financial institutions. The study said only nine per cent of the population had taken new loans from a bank, credit union or microfinance institution in the past year. In India, only 35 per cent have formal accounts versus an average of 41 per cent in developing economies.

India also scored poorly in respect of credit cards, outstanding mortgage, health insurance, adult origination of new loans and mobile banking. “Financial inclusion remains a substantially unfinished agenda,” said the report.

RBI has admitted that they have faced criticism from extreme votaries of strong interventionist policies to promote financial inclusion and it was argued that such directed lending rates leads to mis-allocation of resources. However, the central bank said it has striven to ensure a balance between equity and efficiency considerations so that financial inclusion is furthered while not compromising on the financial health and the lending capacities of the banks.

Latest figures indicate that there are over 110,000 business correspondents employed, which is not a large number in context of the number of banked villages, RBI said. However, the regulator said, they have taken several initiatives to make financial inclusion high on the agenda of Indian banking in the recent years. It required banks to provide no-frills account, tried to improve the outreach of banks through the business facilitator and business correspondent (BC) models and set up goals for banks to provide access to formal banking to all 74,414 villages with population over 2000.

RBI also adopted the information, communication, technology-based agent bank model through BCs for door-step delivery of financial products and services since 2006. However, in its annual report, RBI said the BC model has not been effective in addressing financial inclusion needs. “The model, by itself, cannot serve the financial inclusion objective. It cannot substitute the services and the customer confidence that the brick and mortar bank branches provide,” said RBI in the report.

RBI said that there is a need for mainstreaming financial inclusion. “To improve the access of the poor to banking, banks need to open branches to provide low-cost intermediation with simple structures, minimum infrastructure for operating small customer transactions and supporting up to 8-10 BCs at a reasonable distance of 2-3 km,” said RBI.

It said that the medium-term strategy for banks would need continue with a multi-facet approach with activities woven around linking of bank finance with self-help groups through microfinance institutions or otherwise. “It is in banks’ medium- to long-term interest to do so, as financial inclusion may be a short-term pressure on banks’ profitability, but over the years could increase the size and scope of banking in India. It will add to the banks’ revenue stream, making it commercially viable,” the regulator added.

SOURCE: Business Standard

India: Microfinance Institutions Network regulator to ask RBI to fix margin cap at 12%

HYDERABAD: Microfinance Institutions Network (MFIN), a self regulatory body of MFIs, has decided to ask the Reserve Bank to fix the margin cap for individual loan to borrowers at 12 per cent, instead of 10 to 12 per cent.

MFIN CEO Alok Prasad said the body will soon be approaching the RBI with the request as the new cap will be challenging for the microfinance sector.

The interest rate cap on individual loans given by MFIs is fixed at 26 per cent.

In a circular issued by the RBI on August 3, the caps on margin were revised to 10 per cent for large MFIs (loans portfolios exceeding Rs 100 crores) and 12 per cent for less than Rs 100 crore.

The average interest paid on borrowings and charged by the MFI are to be calculated on average monthly balances of outstanding borrowings and loan portfolio, respectively, the RBI had said in the circular.

“What the industry is saying is that the earlier position of 12 per cent which was there before August 3 circular should be restored. The industry is asking to maintain the status quo ante,” Prasad told reporters here.

Replying to a query, he said post AP MFI Act, the Indian microfinance industry size shrunk to Rs 16,000 crore from Rs 26,000 crore in 2010.

“Outside Andhra, with cautious optimism, I would say the industry would grow at 25 to 30 per cent in the current financial year,” he said.

The situation is improving outside Andhra Pradesh and banks and equity participants are showing interest in the industry and funding has selectively started, he said.

On situation in Andhra Pradesh, Prasad said the logjam will only be cleared though dialogue which is yet to take place.

After witnessing a spate of suicides of borrowers allegedly due to coercive recovery practices by the MFI agents, the then AP government had come out with AP Microfinance Ordinance in October, 2010 and subsequently made that into an Act. The Act affected the activities of all MFIs leaving around Rs 7,000 bad debts in the market.

SOURCE: The Economic Times

India: Banks bullish on microfinance post AP crisis, thanks to RBI rules

By Sachin Kumar, Hindustan Times

The microfinance sector has again started witnessing a flow of funds from banks — which had become hesitant in lending to micro lenders in 2011 — encouraged by the new set of regulations introduced by the Reserve Bank of India (RBI). The new rules brought in clarity in the regulation of microfinance institutions (MFIs).

“We have had a dramatic turnaround in situation from the fourth quarter (January- March) of 2011-12,” said S Dilli Raj, chief financial officer, SKS Microfinance. “For the first nine months, all that we could access was an incremental debt of Rs. 417 crore while in the fourth quarter we were able to raise Rs. 998 crore, primarily from banks.”

Banks became cautious in lending to MFIs after the Andhra Pradesh crisis. After reports of suicide of borrowers in Andhra Pradesh (AP), the state government had come out with the AP Microfinance Ordinance in October, 2010, and subsequently made it into an Act which crippled the activities of all MFIs.

“With the promulgation of the Andhra Ordinance regulating MFIs in 2010, the industry found itself in an environment of heightened regulatory and political risks which resulted in bank funding coming to a virtual halt in 2011,” said Alok Prasad, CEO, Microfinance Institutions Network. “However, with consistent signals of support from the RBI and the finance ministry, risk perceptions have improved and in the last quarter of 2011-12, there was a significant inflow of fresh bank funds, albeit to select MFIs.”

In the second half of 2011-12, RBI said the loans extended by banks to MFIs from April 1 will be classified as priority sector lending. Also the Microfinance Bill, which makes RBI a sole regulator, has been tabled in Parliament and it is expected to be passed some time this year.

India: MFI body wants more relaxation

By Krishna Pophale, Business Standard

Micro lenders seem discontented with the relaxations offered by the Reserve Bank of India (RBI) on the functioning of non-banking finance company-microfinance institutions (NBFC-MFI).

The industry body for microfinance companies, Micro Finance Institutions Network (MFIN), plans to approach the banking regulator for more headroom on the margin of large NBFC-MFIs.

“Though RBI has given pricing flexibility to the MFIs, it has been done in conjunction with a tightening of the margin caps. For MFIs with loan portfolios greater than Rs 100 crore, the margin cap has been reduced to 10 per cent. This reduction will put pressures on their profitability and sustainability,” Alok Prasad, chief executive of MFIN, told Business Standard.

“We will again meet the central bank and explain our position to them. For the margin requirements, a restoration of status quo ante (the way things were before) will be sought.” Last week, RBI offered some relief to the stressed microfinance sector by waiving the 26 per cent cap on their lending rates. The banking regulator, however, retained the margin cap with some modifications in the norms.

The margin cap, earlier fixed at 12 per cent, has now been fixed at 10 per cent for large micro lenders and retained at 12 per cent for other microfinance companies. RBI said NBFC-MFIs need to ensure that the average interest rate on loans during a financial year does not exceed the average borrowing cost during that financial year plus the margin, within the prescribed cap. More, while the rate of interest on individual loans might exceed 26 per cent, the maximum variance permitted for individual loans between the minimum and maximum interest rates cannot exceed four per cent, it added.

Prasad said a margin cap of 12 per cent for all microfinance companies would be “fair and reasonable”.

While he admitted that RBI’s revised norms for NBFC-MFIs would provide some relief to the troubled microfinance sector, he said the government of Andhra Pradesh should relax rules to revive micro lending business in the state.

In October 2010, the Andhra Pradesh government passed a legislation to restrict micro lending of private players following reports that these lenders charge exorbitant interest and use coercive methods to recover loans. It mandated compulsory registration of microfinance companies, loan collection near local government offices, and banned weekly recovery of loans.

“RBI has made considerable efforts towards addressing the issue of (microfinance companies’) Andhra Pradesh loan portfolios. However, given the nature of the problem, the issue remains alive. For dealing with it systemically, the Andhra Pradesh government has to be brought into the equation,” Prasad said.

The central bank has said that the provisions made on Andhra Pradesh loan portfolios would now be notionally reckoned as part of micro lender’s net worth and this recognition would be progressively reduced equally over five years, till March 2017.

This would ensure that despite making provisions on Andhra Pradesh loan portfolios, which are non-performing for nearly two years now, microfinance companies are able to maintain their capital adequacy as their net worth would not be eroded. Microfinance companies would have to maintain a capital adequacy ratio of 15 per cent.

India: RBI may relax norms to revive microfinance industry

By TE Narasimhan, Business Standard

Microfinance institutions (MFIs) in the country can breathe easy as the Reserve Bank of India (RBI) is likely to relax some of the norms pertaining to their net worth, capital adequacy and provisioning needs. The relaxations are expected to help troubled micro-lenders emerge out of the crisis.

“The rollout of the new regulatory regime has run into some bottlenecks. Some MFIs are unable to comply with the qualifying asset criterion for registering as NBFC-MFI, and therefore banks are reluctant to make fresh loans to them as such loans do not qualify as priority sector lending,” RBI governor D Subbarao said at an event organised by Indian Overseas Bank to celebrate their platinum jubilee here today.

“Small MFIs are also not able to meet the Rs 5 crore entry point capital to be eligible to register as NBFC-MFI. In particular, the Andhra Pradesh-based MFIs, saddled with huge losses, large NPAs (non-performing assets) and eroded capital, are facing an especially acute problem in complying with the capital and provisioning norms. RBI is working on resolving these issues so that MFI operations can get back on track,” he added.

On December 2, 2011 the banking regulator created a new category of finance company, NBFC-MFI, and released operational guidelines for these firms. As per the new guidelines, NBFC-MFIs must make 100 per cent provisions on aggregate loan installments that are overdue for 180 days or more. MFIs were so far maintaining 10 per cent provisions on the loan amount, where the repayment is due for more than 180 days.

For Andhra Pradesh-based micro-lenders it was impossible to make such provisions as almost all their receivables were due for over 180 days following the crisis in the sector. The Andhra Pradesh government had curbed micro-lending by private players in the state that plunged the sector into a crisis and affected loan recoveries of local MFIs.

These norms were supposed to be effective from April 1, 2012.

Industry players said if they had to make these provisions it would wipe out their net worth. In other words, these firms would not be able to meet the guidelines relating to minimum net worth of Rs 5 crore and capital adequacy ratio of at least 15 per cent.

In March, 2012 the banking regulator had extended the deadline for new provisioning and asset classification norms by one year to allow MFIs more time to get their house back in order. These rules, RBI said, will be effective from April 1, 2013.

The micro-lenders through their industry body Micro Finance Institutions Network (MFIN) had made representations to RBI seeking more relaxations.

“Delaying the deadline by one year did not really solve the problem. We will face the same issues next April. Hence, representations were made to RBI. We are yet to get a feedback from them. So, it is good to know that they are considering our proposals,” said a chief executive of a Hyderabad-based micro-lender.

Subbarao, however, noted that investors’ sentiment towards the MFI sector has improved in the past few months as some of the micro-lenders have been able to raise money from venture capital funds.

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”.

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