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Responsible micro-lending has a long road to travel, says study…….Manish Basu
Analysis of data shows key MFIs are not passing on the benefits of reduced costs to their borrowers Are microfinance institutions (MFIs) responsible lenders, asks a recently released report by Access Development Services, a not-for-profit organization that offers consulting services to firms that make small loans to the poor, citing studies that show MFIs have been making supernormal profits compared with Indian commercial banks.
What is more, the Access analysis of financial data from the last four years show a large number of key MFIs are not passing on to their borrowers the benefits of reducing operating costs and the increase in business volumes even though they charge high rates of interest going up to 40% a year.
The observations come at a time when “default risks are rising” and MFIs are under pressure from the government to pare interest rates.
A study of 31 leading microfinance lenders show only five passed on to their borrowers the benefits of reducing operating costs as business volumes expanded—the yield on their portfolios reduced.
But, among the others, 14 shored up profits by reducing operating costs—the yield on their portfolios went up—and the remaining 12, could not pare costs at all, resulting in an increase in lending rates.
The study “leads to the obvious conclusion that responsible finance has a long road to travel before reaching customers”, Access said in its State of the Sector Report 2010.
It is impossible to reduce lending rates commensurate with the decline in operating costs, according to Chandra Sekhar Ghosh, chairman and managing director of Bandhan Financial Services Pvt. Ltd—India’s fourth largest MFI by loan portfolio.
“It is true for any industry… you could reduce interest rates gradually,” said Ghosh. “But at the same time, we should be budgeting for uncertainties—in our business, we deal with a lot of them.”
Also, it’s difficult for MFIs to raise rates, says Subhankar Sengupta, managing director of Arohan Financial Services Pvt. Ltd, one of the top 20 microfinance lenders in India, which operates in West Bengal, Bihar and Assam and has a loan portfolio of Rs.120 crore.
“It’s not the same as banks… once reduced, it is impossible for MFIs to raise interest rates,” he said. “So, we have to keep in mind that interest rates could rise and decide lending rates accordingly. For instance, cost of funds is surely going to increase because of the ongoing crisis.”
Another study of some 70-odd MFIs shows that for more than half of them return on asset, which is a measure of profitability, was more than 2% on a sustained basis. For at least six, it is in excess of 7%, and among them, one reported a return of asset of 9.41%.
Compared with that, the best performing private bank in India reported a return on asset of 2%, and public sector banks reported an average return on asset of 0.6% in fiscal 2009, the Access report said.
Access says MFIs were shoring up return on assets because it is one of the key determinants of equity valuation. On the other hand, the 15 MFIs that reported negative or low return on assets, or less than 0.5%, had huge operating costs, “not commensurate with their business model”.
Bandhan’s Ghosh says more and more MFIs were raising cash through share sale because banks weren’t willing to lend cheap. “To access the equity market, it is imperative to maintain high return on assets, but in my view, it should not exceed 4%.”
In fiscal 2010, MFIs in India raised at least $213.89 million selling shares to private investors, and between April and July this year, they raised another $66 million, according to the Access report.
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