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Malegam report: MFIs worried over interest margin cap, tighter control

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Mr M.R. Rao(left), Managing Director and CEO of SKS Microfinance, and Mr S. Dilli Raj, CFO, at a press conference in Hyderabad on Thursday.
Mr M.R. Rao(left), Managing Director and CEO of SKS Microfinance, and Mr S. Dilli Raj, CFO, at a press conference in Hyderabad on Thursday.

G Naga Sridhar

Hyderabad, Jan. 20

Micro-finance institutions (MFIs) are worried over the 10-12 per cent margin cap on the interest recommended by Reserve Bank of India's Malegam Committee, among other proposals.

“The margin cap at 10 per cent is very less in view of the high operational costs involved. It contains growth as operational costs have to be cut down,'' Mr Udia Kumar, Managing Director, Share Microfin, told Business Line here on Thursday.

Though, the panel suggested a concession of two per cent more in cap for MFIs with outstanding loans not more than Rs 100 crore, that would not be viable for medium-level MFIs due to lack of scalability benefits, said the MD of a Chennai-based MFI.

Many MFIs expected that the panel would not go by Andhra Pradesh Government's strong plea that the interest should be capped between 18-24 per cent keeping in line with RBI's known reluctance in regulating interests.

“But, we are duly worried that a cap is suggested at 24 per cent. It may be possible to adopt in some regions where one has a strong presence, but a blanket cap is quite unexpected and unviable,” said CFO of a large MFI.

Mr M.R. Rao, Chief Executive Officer of Hyderabad-based SKS Micro, said the implementation of the norm that not more than two MFIs should lend to the same borrower “is very difficult” in the absence of a proper credit bureau.

Mr Dilli Raj, CFO of SKS Micro, said if implemented, the norms could lead to 100-120 basis points erosion in the profit margins of the country's only listed MFI.

Though SKS “has no problems,” suggestions on maintenance of solvency and a minimum networth of Rs 15 crore might be issues for smaller players in the industry, he added.

“However, we broadly welcome the report as it might remove certain uncertainties over future,'' he said.

Securitisation norms

Mr Udia Kumar too said the assignment and securitisation norms (such as deduction of credit enhancement from net-owned funds for calculation of capital adequacy) were “disadvantageous.”

The management cannot be made fully responsible as mooted by the panel for coercive methods of recovery as it was also a field-level issue, he added.

Related Stories:
Malegam panel wants 24% cap on microfinance loans
RBI to base action on MFIs on Malegam report
RBI plans interim relief for MFI sector

(This article was published in the Business Line print edition dated January 21, 2011)
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