Microfinance to remain subdued over medium term: Crisil

NEW DELHI: Growth prospects for microfinance institutions (MFIs) will remain subdued over the medium term, ratings agency Crisil said on Monday.
It said operating challenges arising from the Reserve Bank of India’s (RBI’s) recently issued guidelines for MFIs, coupled with expected difficulty in raising capital, are likely to trigger consolidation in the sector.
However, RBI’s guidelines should ease pressure on MFIs’ profitability, as it has relaxed some recommendations of the Malegam committee. Continuation of priority-sector status and steps to enhance transparency and governance should improve confidence and enable resumption of bank funding, the ratings agency said.
In its annual monetary policy review last week , RBI said bank loans to all MFIs, including NBFCs working as MFIs on or after April 1, 2011, would be eligible for classification as priority sector loans under respective category of indirect finance only if the prescribed percentage of their total assets are in the nature of "qualifying assets" and they adhere to the "pricing of interest" guidelines.
It said that banks should ensure a margin cap of 12% and an interest rate cap of 26% for their lending to be eligible to be classified as priority sector loans. The central bank said that loans by MFIs can also be extended to individuals outside the self-help group (SHG)/joint liability group (JLG) mechanism.
CRISIL said clarity on regulatory jurisdiction for MFIs is a critical next step for long-term sustainability of the sector.
“The MFI sector’s growth is likely to remain subdued over the medium term, especially in regions with high microfinance penetration, because of proposed regulatory restrictions on multiple lending, loan size, and end-usage of loans. This will provide an impetus for consolidation in the sector,” said Rupali Shanker, head Crisil ratings in a statement. To comply with the new regulations, MFIs would have to enhance the robustness of their internal systems and processes, strengthen their monitoring mechanisms, and invest in training their employees. She said the RBI’s recent guidelines are expected to provide cushion to MFIs’profitability, and enable resumption of bank funding to MFIs.
The RBI has allowed a higher cap on interest rates and margin (of 26 per cent and 12 per cent respectively) and has clearly defined the manner of computation for these caps. RBI has also increased the limits on annual income of borrower households, enhanced the maximum ticket size of loans, allowed a higher limit on indebtedness of borrowers, and reduced the minimum threshold to qualify as an MFI.
The ratings agency said financial risk profiles of MFIs with significant operations in Andhra Pradesh are likely to remain under considerable stress because of continued low collection rates, liquidity pressures, and expectation of substantially high credit costs over the medium term. Substantial improvement in recovery rates and timely restructuring of these MFIs’ bank loans would be critical for their survival, it said.