Funding costs of NBFC-MFIs likely to come down: Icra

The cost of funds of NBFC-MFIs (Non-Banking Finance Company-Micro Finance Institutions) could come down by 100-400 basis points depending on the share of funding they are able to receive from the proposed Mudra (Micro Units Development and Refinance Agency) Bank, according to Icra.

The credit rating agency made this assessment on the basis of the assumption that Mudra Bank lends at 7-10.5 per cent to NBFC-MFIs and these entities are able to get 20-40 per cent of their funding from the Bank.

Once the cost of funding of MFIs comes down, they in turn will be able to pass on the benefit to their borrowers, say analysts. The average lending rate of MFIs is currently around 26 per cent.

The present funding cost of MFIs, according to Icra, vary from 12 to 16 per cent with the median cost of funds being 14 per cent.

Icra said since the Budget has allocated a sizeable corpus (₹20,000 crore) of low-cost funding to Mudra Bank, it could become a prominent source of funding and liquidity to NBFC-MFIs and other players in the sector. Mudra Bank is likely to have access to low-cost funds from shortfalls in banks’ priority sector lending.

Qualifying assets NBFC-MFIs are financial intermediaries that are non-deposit taking, have minimum net owned funds of ₹5 crore (₹2 crore for those registered in the North-Eastern region), and have not less than 85 per cent of their net assets in “qualifying assets”.

A qualifying asset means a loan which satisfies criteria such as the loan being disbursed only to a borrower with a rural household annual income not exceeding ₹60,000 a year or urban and semi-urban household income not exceeding ₹1.20 lakh a year; loan (without collateral) amount does not exceed ₹35,000 in the first cycle and ₹50,000 in subsequent cycles.

Further, aggregate amount of loans given for income generation, should not be less than 75 per cent of the total loans given by the MFIs. The agency observed that the government’s proposal to create Mudra Bank as a single regulator for all types of entities in the microfinance space is a positive for the sector.

“It is likely to bring in uniform regulation and a code of conduct for these (MFI) entities. This would facilitate the adoption of responsible finance principles by all lenders and in turn help prevent issues of overleveraging of borrowers,” said Vibha Batra, Senior Vice-President, Icra, in a report.

Icra assessed that a single regulator for all entities engaged in microfinance could lead to adoption of a uniform code of conduct for all players in the industry which could also define the best practices for delivery of financial services to the underserved.

A uniform code of conduct for all players would help in standardising the regulations for the sector as well, Icra said and pointed out that for Housing Finance Companies, National Housing Bank has played a similar role of a regulator and refinance agency.

Besides the ₹20,000-crore corpus of low-cost funding, Icra said, Mudra Bank’s ₹3,000-crore credit guarantee corpus for providing guarantees to loans extended to micro enterprises, which usually find it difficult to provide collateral, could encourage lenders to take higher exposures with limited risks.

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