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Microfin cos likely to lose access to cheap funds from banks…… M Rajshekhar
NEW DELHI: Access to cheap funds from banks for microfinance institutions, or MFIs, may be snapped under two years if RBI endorses the recommendations of a committee constituted by it.
A Reserve Bank of India committee headed by executive director VK Sharma, in its draft report, has recommended that the priority sector status, which is accorded now to banks’ exposure to Non-Banking Finance Companies, or NBFCs, should be withdrawn. However, to ensure a non-disruptive, and orderly, phase-out or exit, the group has recommended a sunset period up to March 31, 2012. ET has viewed the report.
Though state-run banks in the country also have a direct exposure to micro-finance through their rural branches, most private and foreign banks used this facility to fulfil their priority sector lending targets. However, sensing an opportunity to boost profits in this form of lending, many foreign banks have been very aggressive in their lending to MFIs. The competition that followed among bankers to lend to select few profitable and professional MFIs has helped some of these institutions to raise funds at competitive rates besides bargaining power.
However, if the priority sector tag were to be withdrawn, banks may not be as enthusiastic in chasing MFIs for business. A top-rated MFI can raise funds from banks at close to 12-13% or a little higher. However, from a bank’s perspective, it can deploy funds on even higher yielding assets such as personal loans where the rate of interest is even higher.
As a Nabard official says: “A big reason why banks lend to MFIs is that these loans are classed as priority sector lending. Without this status, not only will banks charge more for these loans, they will also have to find other options for rural lending to offset these loans.”
Recently, RBI had also sent an informal communication to NBFC MFIs, telling them among other things to bring their return on equity below 20%, their return on assets, or RoA, below 2%, to reduce interest rates, to raise transparency levels and to improve governance standards.
The draft report of the RBI committee is yet to be placed in public. The committee, constituted in November 2009 was initially mandated to examine the pros and cons of the recommendation made by the Committee on Financial Sector Reforms (which was chaired by Raghuram G Rajan) about the introduction of priority sector lending certificates (PSLCs) and to make suitable recommendations on its introduction and their trading in the open market. Later, its terms of reference were widened to also review the pros and cons of inclusion of bank lending to micro-finance institutions under priority sector lending.
Vijayalakshmi Das, MD of Ananya Finance for inclusive growth and Founder, Friends of Women World Banking, (lender to MFIs) says without priority sector lending benefits, microfinance cannot survive.” The due diligence carried out by banks will be very different, for one. Today, by virtue of the fact that we lend to the poor, it is easy to convince a banker to lend to us. That advantage will go away,” she says.
She reckons that the impact will be severe on smaller MFIs considering that the larger ones can still leverage their balance sheets.
The draft report mentions recent steps taken by RBI to drive financial inclusion — like allowing banks to open branches in tier-III till tier-VI centres without obtaining clearances; current trends in branch expansion; banks’ formalising their financial inclusion plans and the removal of any ceiling on the interest banks can charge on loans up to Rs 2 lakh.
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