Big players eye microfinance sector

The study was based on an analysis of a representative sample of 14 of the largest MFIs in India. ‘‘Lower costs of bank borrowings vis-a-vis other domestic institutional sources, and improved accessibility of bank finance, have led to these changes,’’ says Krishnan Sitaraman of Crisil.

The removal of interest rate cap on microfinance loans and the categorisation of bank credit to the sector as priority sector lending, have contributed to increases bank funding. Crisil expects bank funding to MFIs to rise further thanks to government and RBI encouragement. This comfort factor is largely due to ICICI Bank’s success in engaging MFIs.

Interestingly, overseas funding to MFIs fell from 31.4 to 25.8 per cent of the total funding, due to a regulatory curb imposed in September 2002 on NGOs accessing external commercial borrowings. Overseas funds had been available to MFIs at low rates — between 2-6 per cent. In April 2005, RBI reversed its stance and now allows MFIs to access ECBs.

MFIs’ reliance on Nabard — that had provided loans at rates lower than banks — has dropped with the interest rate fall in the last two years. Crisil expects banks to overtake apex MFIs as the primary source of funding for many large- and medium-sized MFIs.

Despite banks’ lower rates, the average borrowing costs of MFIs have risen from 10.5 in 2001-02 to 12 per cent in 2003-04. High borrowing costs combined with high operating expenses (from 4-19 per cent) constrain MFIs’ ability to offer competitive loans to customers. Banks, especially public sector ones, lend directly to self help groups at 9-12 per cent.

Says an RBI official, ‘‘The Self-Help Group (SHG)-Bank Linkage Programme by commercial banks, RRBs and cooperative banks has emerged as the major microfinance scheme. By March 31, 2005, 1.6 million SHGs have been linked to banks and the total flow of credit worked out to over Rs 6,800 crore.’’

Nabard and banks have set a target of linking additional 0.6 million SHGs by end-March 2007. There are concerns, though. Over 60 per cent of the MFIs actually mobilise deposits from members, which can be construed as a violation of the RBI Act, 1934. Intriguingly, MFIs registered as NBFCs are allowed to raise public deposits, but none of them accept deposits.

Crisil also saw instances of asset quality slippages due to MFIs’ inability to raise funds timely. This, combined with high costs and regulatory risks, could hamper the sector.