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24% CAP
Staterun banks ask MFIs to lower rates …….DINESH UNNIKRISHNAN
Some Microfinanciers unwilling to reduce rates citing fear of closure; other sources of funding sought
Public sector banks have started insisting that microfinance institutions (MFIs) that borrow from them do not lend the money at exorbi- tant interest rates, following a government order.
But MFIs are unwilling to bring down their rates to the lev- els being demanded by the banks. While some MFIs say the move may force smaller funds to close down, others are willing to turn to alternative sources of funding. MFIs typically borrow at 10-12% from banks and lend small sums to poor farmers and small entrepreneurs who are often outside the banking net at 22-36% without asking for collateral.
A finance ministry note in September asked public sector banks to make sure that MFIs that borrow from them lend on the money at reasonable rates, so that the small loans are not a burden on the rural poor.
It also asked them to prevent the practice of evergreening under which a lender gives a fresh loan to a borrower to repay an old loan.
“This is particularly essential for the large and well established MFIs,“ the note said.
Although the banks were ini- tially reluctant to abide by these directives, many of them are now planning to enforce a 24% interest rate cap on loans issued by MFIs.
“From now on, MFIs will have to sign an agreement, assuring us that they will not lend at more than 24%. If they fail to do this, they will not be given the financial support,“ Bank of India’s executive direc- tor M. Narendra said.
S. Govindan, general manager of Union Bank of India, said: “We have decided not to lend to MFIs unless they submit a specific plan to bring down their interest rates to 22-24% over a period of time. After assessing the cost structure of such firms, we will set a cutoff date for them to do this.“
T.Y. Prabhu, chairman and managing director of Oriental Bank of Commerce, said unless MFIs come up with a road map to bring down high interest rates, “they may not get the support“.
Another larger publicsector lender, Bank of Baroda, has put in place a clause in loan agreements with MFI to ensure that they do not charge “abnormally high rate to their borrowers“.
“Fresh loans will be given only with a condition that the ultimate benefi- ciary will not be charged more than 22-24%,“ said N.S. Sri- nath, executive director with Bank of Baroda.
The country’s largest lender, State Bank of India (SBI), said it does not lend to MFIs who charge unusual rates even now.
“We are not lending to any MFI who charge abnormally high rates,“ chief financial officer S.S. Ranjan said. SBI has an MFI portfolio around `1,500 crore, including loans given to self-help groups, he said.
Public sector banks are re- quired to channel 40% of their advances into agriculture and small-scale industries, dubbed as priority sector loans.
They can also lend to MFIs to meet the target, as these firms then issue the loans to farmers and small entrepreneurs. Selfhelp groups also seek short-term funds from MFIs. Indian MFIs form a `18,500 crore industry.
The country has nearly 800 MFIs, according to Nabard web- site, but only the top 10 reach 100,000 clients. The sector added 8.5 million consumers in fiscal 2009, up 60%, taking its consum- er base to 22.6 million, according to a study by research and consultancy firm Access Development Services.
SKS Microfinance Ltd, the country’s largest MFI, had disbursed loans of `14,300 crore until March to nearly 6.8 million borrowers.
Shubhankar Sengupta, managing director of Kolkata-based Arohan Financial Services Ltd, said most MFIs will have to shut down if banks enforce the 24% cap. “There will not be any mi- crofinance companies in the country except a few bigger ones (that can afford such interest rates),“ he said. “You need to reach a certain size to bring down your rates. One cannot survive lending at 24%. Banks have to be vigilant and need to look at the operating cost and structure of their MFI clients.“
Arohan has a `120 crore loan portfolio and 230,000 clients across Bihar, West Bengal and Assam.
Samit Ghosh, managing director of Bangalore-based microfinance firm Ujjivan Financial Services Pvt. Ltd, one of India’s top 10 MFIs, said the sector won’t suffer a lot even if state- owned banks shut the door on them. “There are private sector banks who are active in the area,“ he said. Ujjivan has about 800,000 customers and a loan portfolio of around `500 crore.
A finance ministry official said the government has not set a cap on MFI interest rates.
“By saying 24%,“ the official said, “we were just giving an ex- ample (to banks). At the end of the day, banks have to see at what rate they can lend.“
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