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Microfinance institutions, vital part of financial inclusion: IOB official

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Ms Nupur Mitra
Ms Nupur Mitra

Our Bureau

Coimbatore, Jan. 26

Microfinance institutions are “part of financial inclusion” and they cannot be wiped out, according to the Executive Director of Indian Overseas Bank (IOB), Ms Nupur Mitra.

She felt that the rate war being launched by big banks, including PSU banks, would not result in elbowing out of smaller players, at least among the retail customers, since parameters such as quality of service weigh with this group in choosing of banks to put their deposits.

Ms Mitra also indicated that the bank would take a call on raising resources from the capital market through issues like qualified institutional placements or follow-on public offers (FPOs) after the annual results for 2010-11 are out.

Speaking to media persons in Coimbatore recently, she said the bank had launched programmes like IOB Sampoorna and ‘IOB Smile' to reach out to the masses.

This would help bring their savings into the banking system and save them from the clutches of moneylenders. She felt that after getting familiar with the banking system, the rural people would come to banks to meet their credit needs.

She said in a country of the size of India, bankers alone cannot serve the credit needs of the population.

While bankers may cover about 50 per cent of the needs, the rest needs to be served by regional rural banks and MFIs.

Answering a question as to whether the cap of 24 per cent on interest rate charged by MFIs, as recommended by the Malegam Committee, was reasonable, she said “it is quite reasonable.”

From the interactions the bank had with MFIs to whom it extended finance, a “band of between 20 to 30 per cent is absolutely reasonable.”

Lending rate

Ms Mitra said the banks lend to the MFIs at the rate of 10-11 per cent. The kind of recovery efforts, the kind of reaching out to villages done by MFIs needed a large manpower and the recovery of money lent has to be at shorter intervals. Even if their administrative cost was 10 per cent and not 14 per cent as MFIs claim, the margin was only 4 per cent and their recovery rate of 95-98 per cent could be achieved only with a large manpower base.

The MFIs are a better option than private money lenders as their rate of interest is regulated and they work in a disciplined manner, she added.

Asked whether the deposit rates that have recently been on an upswing would bottom out, she said it would hit a plateau if inflation moderates. Any monetary steps to tackle inflation would have an impact on interest rates.

Asked whether IOB, which was raising funds on private placement basis through QIPs, perpetual bonds etc, was looking at a Follow on Public Offer ( FPO) of equity shares, the IOB ED said with the Basel III norms, the bank has to strengthen its Capital to Risk Weighted Assets Ratio (CRAR). The bank was growing at slightly above the market rate at about 20-24 per cent to sustain which it needed sufficient capital which could be done by various ways like ploughing back the profit, going for FPO, private placement etc. The bank recently raised Rs 2000 crore through Tier I and II bonds and intends to go for perpetual bonds also.

Ms Mitra said after that the bank would “definitely go for some QIP” and would then look at the ratio of Government holding and if it gets money from Government, then “capital raising will be slightly pushed (back) further.” If this did not occur, then the bank may go for capital raising. All these things would have to wait for the bank's March 2011 (annual) results. At present, GoI's stake in IOB is 63 per cent and even banks with lower GoI stake have got its funding.

Asked whether the continuous raising of deposit rates by bigger banks with high brand value would edge out small banks, Ms Mitra said just because interest rates go up by 15-25 basis points, retail customers do not switch banks, though this may happen with bulk depositors, as the former give weightage to service and relationship.

IOB also was planning to have exclusive branches to disburse gold loans in States were gold purchase was predominant at commercial rates of interest.

(This article was published in the Business Line print edition dated January 27, 2011)
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