Money & Banking

Malegam committee's margin cap proposal will hurt smaller MFIs

Our Bureau Mumbai | Updated on November 10, 2017

Mr Vikram Akula



The margin cap recommended by the RBI-appointed Malegam committee could trigger consolidation in the microfinance institutions (MFIs) sector as smaller companies may find it difficult to adhere to the cap, according to Mr Vikram Akula, Founder and Chairperson, SKS Microfinance.

The committee has suggested an average margin cap (the difference between the borrowing and lending costs of MFIs) of 10 per cent for MFIs having a loan portfolio of Rs 100 crore and 12 per cent for smaller MFIs.

“Smaller players do not have operational efficiency and scale. So, lending at 26 per cent, after taking into account the cost of borrowing (12 per cent), margin cap (12 per cent), processing fee (1 per cent) and insurance cost (0.7 per cent), will become a challenge. This recommendation will hurt smaller MFIs,” said Mr Akula.

Consolidation will happen by design and not by accident, resulting in the banking regulator having oversight of a limited number of MFI players, which are classified as non-banking finance companies, he added.

Consolidation will not happen through mergers and acquisition but via shifting of clients from smaller MFIs to larger MFIs as the latter will be able to offer loans at relatively cheaper rates, said Mr Akula.

AP legislation

Hoping that the RBI will be the sole regulator of NBFC-MFIs, Mr Akula observed that the restrictive AP Microfinance Act has served its purpose by shining light on the flaws in the MFI model. However, now it is time the State Government repeals the Act so that NBFC-MFIs can carry on their business in AP as per the framework outlined by the Malegam committee, he said.

“The AP Microfinance Act impinges on operational issues with respect to time and space. The Act took time and space away from the borrowers. The Malegam committee said that MFIs can deal with borrowers not necessarily at the Gram Panchayat office but at any public place, which is visible to all. While the Act requires repayments to have a monthly cycle, the committee says that the repayment — weekly, bi-weekly, or monthly — cycle should be left to the borrower to decide,” said Mr Akula.

Published on February 04, 2011

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