India Equity Research Reports, IPO and Stock News Visit http://indiaer.blogspot.com/ for complete details �� ��
We hosted a conference call with Mr Alok Prasad, CEO of MFIN, to understand the impact of recent regulatory changes on
the microfinance sector and its future prospects.
Key takeaways
Strong growth, irresponsible lending practices, lending for consumption rather than for productive purposes, and high
returns generated by microfinance institutions (MFIs) attracted regulatory attention towards the sector.
Business has dropped significantly in the state of Andhra Pradesh (AP) after the introduction of the Microfinance Bill.
Large part of the collections lost over the last 2-3 months is unlikely to be recovered (though quantum cannot be
ascertained), leading to an increase provisioning requirements.
Business in the states neighboring AP has also been impacted. However, collection efficiency in non-AP states has
remained stable.
The AP state government's ordinance is an over-reaction and steps are being taken to create a more adequate
regulatory framework for the MFI sector.
RBI is likely to create a regulatory framework for MFIs post the submission of the YH Malegam Committee report
(likely by January 2011).
The central government is working towards a new Microfinance Bill, which may override all state government regulations.
Efforts are being made towards greater transparency in grant of loans, customer education and enhancement of
financial literacy to prevent exploitation of customers.
Business of MFIs will enter a new normalcy phase by 1QFY12. While interest rate charged by MFIs is not likely to be
capped, return ratios would be benchmarked to certain parameters, leading to some moderation in profitability, going
ahead.
Over the medium term, repayment rate in India would gradually trend towards the global average of ~95% from the
current level of 98-99%.
Strong growth, high profitability attracted regulatory attention towards
MFI sector
Extremely rapid growth ~95% CAGR over the last six years - to some extent led to
irresponsible lending practices (lack of transparency, high interest rates on loans,
inadequate collection systems) followed by MFI's.
Loans were also given for consumption rather than productive purposes (though exact
details are not available, ~20% of MFI loans are believed to be for consumption).
Higher growth and better returns compared to government initiated program of Self
Help Group (SHG) for microfinance customers attracted regulatory attention towards
the MFI sector.
Business slowed and repayment rate dropped post introduction of
ordinance
Most MFIs have stopped fresh disbursements in AP or have slowed down (if not stopped
completely) post the introduction of the ordinance. This is due to the changes required
in the business models as per the ordinance issued and the inference of harsh punishment
following any complaints against field staff.
Accessibility to funds got constrained, as banks froze the credit lines for MFIs. It is
expected that there would be limited release of funds till clarity emerges on the regulatory
framework for MFIs.
Collection efficiency for MFIs in AP (post introduction of the bill) has remained low at
15-20%. Based on the notification issued by the AP government, MFIs have shifted to a
monthly collection cycle from the earlier practice of a weekly collection cycle. This is the
key reason for decline in collections.
Talks are on to restructure collections lost over the last 2-3 months in AP. But it seems
impossible for certain customers to repay loans, as chunky repayment is beyond their
means. This would lead to certain loss, for which provisioning would have to be made.
Business in the states neighboring AP has also been impacted. However, collection
efficiency in non-AP states has remained stable.
Key aspects of AP state government's ordinance
On 4 December 2010, the AP government passed the Andhra Pradesh Microfinance
Institutions (Regulation of Money Lending) Ordinance, 2010. Following aspects of MFIs'
business model will undergo a change post the Bill:
Shift to monthly collection against the current practice of weekly collection.
Interest payment as a whole should not exceed the principal.
Panchayat office to be the sole collection center against MFIN's demand of a public
place for collection. Currently, MFIs conduct center meetings at public locations to
collect installments.
Prevents door-to-door collections, and disallows having loan collection agents who
are not on the rolls of the MFI.
All branches in a district to be registered, against MFIN's demand for single and
centralized registration.
AP state ordinance is an over-reaction and efforts are on to create more
adequate regulatory framework
MFIN is challenging the constitutionality of the AP bill on the grounds that a state cannot
pass an act on an institution regulated by a central institution. The AP bill is also being
challenged on the grounds that it is impacting the right to conduct business in a normal
course.
RBI is likely to create a regulatory framework for MFIs post the submission of the YH
Malegam Committee report (likely by January 2011). MFIN is in dialogue with RBI and is
providing adequate support to create the necessary framework.
The central government is working towards a new Microfinance Bill, which is likely to be
presented in Parliament in the next 4-5 months. This Bill may override all state
government regulations.
MFIN working towards improving transparency in the sector
MFIN, a self-regulatory body, has laid down a code of conduct to be practiced by its
members to ensure responsible lending. MFIN is enabling the process of credit information
sharing through High Mark and CIBIL.
It is also encouraging customer education and financial literacy to ensure that there is
no exploitation of customers.
MFIN is working closely with an NGO called Micro Finance Transparency to increase
transparency of loan pricing (since March 2010) and initial results are scary with regards
to pricing. ~85 MFIs have participated in this study. The data would be normalized to
make it comparable before being put in public domain (expected by February 2011).
MFIs have been given time till the end of December 2010 to alter the data submitted.
Business would return to new normalcy by 1QFY12; repayment rate to
drop to 95% in medium term
The AP bill is being termed as a game changer, and it is expected that business of MFIs
will enter new normalcy by 1QFY12.
While interest rate charged by MFIs is not likely to be capped, return ratios would be
benchmarked to certain parameters, leading to some moderation in profitability.
Loans granted by MFIs would continue to get the benefit of being classified as priority
sector lending. This is on the back of modest financial penetration in the country and
availability of credit to the needy sections of the society.
Most borrowers generate income on a daily or weekly basis; therefore, a weekly collection
cycle suits borrowers. Maintaining the repayment efficiency based on monthly collection
cycle would be a key challenge.
Globally, repayment rate for MFI loans is ~95% while for Indian MFIs, it is currently 98-
99%. Over the medium term, repayment rate in India is likely to gradually trend towards
95%.
About the speaker
Mr Alok Prasad, the CEO of MFIN, is a veteran banker. Mr Prasad has over 30 years of
banking and financial services experience. He was on the boards of CitiFinancial and Citicorp
Maruti Finance, and has served the Citi Microfinance Group (India) as Country Director.
About MFIN
Microfinance Institutions Network (MFIN) is a self regulatory organization (SRO), comprising
of 37 MFIs. It aims to work with regulators to promote microfinance to achieve greater
financial inclusion. It has defined a code of conduct for responsible lending. For the very
first time in the MFI sector, MFIN is enabling the process of credit information sharing
through High Mark and CIBIL.
No comments:
Post a Comment