Small MFIs troubled by higher capital norm

For microfinance institutions (MFIs) with an outstanding credit portfolio of less than Rs 50 crore the Malegam Committee report might sound a death knell. The report recommends that the minimum net-worth for NBFC-MFIs should be Rs 15 crore and that too in tier-I form. MFIs believe that this would mean that small players would find it hard even to survive.

Till now, MFIs with less than Rs 50-crore outstanding portfolio have had a capital of a little over Rs 5 crore. “And now that the capital requirement has been fixed at Rs 15 crore, who will invest about Rs 10 crore in these MFIs? Investment would be difficult to come by, as there is a lot of uncertainty regarding their margins,” Mr Suresh Krishna, Managing Director, Grameen Koota Financial Services, a Bangalore-based MFI, told Business Line .

With cost of funds going up to 16 per cent, they would find it difficult to sustain at 24 per cent rate of interest on credit, as recommended by the Malegam Committee. At 8 per cent margin, they would be “certainly making losses, and who would want to invest in a loss-making company”, he asked.

Besides, MFIs point out the disparity with regard to capital requirement between a regular NBFC, local area bank and an NBFC-MFI. They ask why should NBFC-MFIs have a capital requirement of Rs 15 crore when for a regular NBFC it is Rs 2 crore and local area bank Rs 5 crore.

“There are so many MFIs in the remote areas of Orissa, Jharkhand, Uttar Pradesh or North Karnataka playing a strategic role. They work in difficult places where the bigger ones do not dare to go,” said Ms Vijayalakshmi Das, Managing Director, Ananya Finance for Inclusive Growth, an Ahmedabad-based NBFC providing financial and non-financial services to MFIs. According to her, there are 53 NBFCs under Ananya with less than Rs 50-crore credit portfolio.

These MFIs mainly serve the backward regions of the country, where customers seldom take big loans, pointed out Mr Krishna of Grameen Koota. Even for larger MFIs like his, the operating model has to change now to accommodate a lower interest rate as recommended by the Malegam Committee, he said.

“It is not just about how we give loans, but also the size of the loan that has to be looked into now. We might have to give higher size loans now, which means the very poor sections will be left out.” In backward regions such as interior North Karnataka, interior Uttar Pradesh and Bihar, where opportunities to invest bigger loans are less, “MFIs will not be able to service higher loan ticket size”, he pointed out.

But what the increased capital requirement for MFIs would achieve, according to Mr Samit Ghosh, CEO, Ujjivan Financial Services, another Bangalore-based MFI, is removing unwanted players from the sector. “A lot of new entrants would be removed, and in turn, competition too,” he said.

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