Reserve Bank of India’s (RBI) decision to do away with the 26% cap on interest rates that microfinance institutions (MFIs) could charge their borrowers, is probably driven by the realisation that there has been the general rise in the cost of funds; indeed, it?s a fact that wholesale money is now dearer after the central bank upped the repo rate in January and given that they rely largely on banks for resources, this will pinch MFIs. The new rules allow MFIs to charge their customers either the average of the base rates of the five largest commercial banks multiplied by a ?factor of 2.75?which works out to roughly 28%?or their underlying cost of funds plus the 10% margin, whichever is lower. Pricing of loans should, in any market, be dynamic and while the new formula will allow MFIs to make enough of a spread to be able to stay in business, there is no danger of customers being
overcharged even in the absence of a ceiling.
Indeed, the central bank?s willingness to be flexible shows it recognises how useful a role these intermediaries play in providing the
underprivileged with access to finance keeping them away from moneylenders. The move could not have been more timely because the microfinance industry, which went through a rough phase in 2011 and 2012, is slowly recovering. RBI data shows that credit provided by these lenders which had risen to R15,100 crore in March 2011 from R10,500 crore in March, 2010, dipped to R11,700 crore in March 2012 before recovering to R14,400 crore in March 2013. More important, the sector seems to be turning profitable once again; after reporting losses both in FY12 and FY13, SKS Microfinance is expected to post a profit this year on a portfolio of close to R2,800 crore.
Unfortunately however, the Microfinance Bill which is aimed at arming RBI with the powers to regulate the sector, overriding all individual state legislation, is yet to become law. Which is why almost all the money being lent by MFIs is outside of Andhra Pradesh where the environment has shown virtually no improvement and the writ of the state government runs large. While most players have pared their exposure to Andhra Pradesh, there is nonetheless a legacy portfolio of R6,000 crore that remains in trouble. The industry has moved on though and disbursements are picking up in states such as West Bengal, Bihar and UP where collections are at 99%; by some estimates business is tipped to grow by about 50% a creditable performance in tough times.
