Micro finance sector represents good investment opportunity……Arun Iyer
BANGALORE: The Indian micro-finance industry (MFI) believes that the sector represents a good investment opportunity and capital adequacy will not
be a constraint in the days ahead.
be a constraint in the days ahead.
This sense of optimism comes at a time when the Reserve Bank of India(RBI) has indicated that the capital adequacy ratio (CAR) for MFIs would be hiked to 15%, effective April 2011. CAR is defined as the minimum quantum of cash that a financial entity like bank or MFI sets aside as a percentage of its asset base or loan book.
While the RBI prescribes a CAR of 9% for commercial banks, in case of MFIs, it is pegged currently at 12%. The Tier-I (defined as core equity and retained earnings) for MFIs would rise from the existing 8% to 12% while the Tier-II (debt or borrowings) would be around 3%.
Overall, the MFI sector represents the fastest growing sector in the Indian banking and finance landscape. With low levels of non-performing assets (NPAs), it has been able to generate interest among the investors, said Alok Prasad, who heads MFIN, a self-regulatory organisation monitoring the sector.
Aalok Shah, research analyst (India private clients) at broking house India Infoline, says it is difficult to estimate the quantum of funding needed by MFIs in the country as this sector needs higher capital on a regular basis. The CAR for SKS Microfinance is placed at 28.3%, he adds.
Kolkata-based Bandhan Microfinance, which currently boasts of a CAR of 18%, believes that it has enough headroom for increasing its lending.
As a MFI, we would not immediately need funding. For the industry, per se, there is a lot of visibility for the sector due to the strong fundamentals. The new listing (of Hyderabad-based SKS Microfinance) will also help in getting acceptance in the capital markets, says Bandhan CMD Chandra Shekhar Ghosh.
According to Vibha Batra, co-head (financial sector ratings) at ICRA, the entire microfinance sector is growing fast and the larger ones are witnessing growth rates in excess of 100% year-on-year, therefore, internal capital generation would not be sufficient to maintain prudent capital adequacy level over the medium term.
Although, fund raising for large entities is easier, there could be issue with smaller agencies as they may not have access to Tier-II capital due to weaker credit profiles. Therefore, they might need to lower their leveraging levels either by curtailing their growth plans or getting additional external equity. This, in turn, would dilute the profitability of such companies.