Microfinance firms need structural changes with entry of more players: MFIN chief

Microfinance sector has been the most coveted space in the last few years among lenders and hence requires more structural changes to de-risk the space, according to Ratna Vishwanathan, CEO, Microfinance Institutions Network (MFIN), a self-regulatory body for microfinance institutions.

Microfinance institutions, or MFIs, which offer small loans to the poor and unbanked, largely women borrowers, are currently grappling with a recovery of loans in the aftermath of demonetisation.

In a free-wheeling chat with Moneycontrol, Vishwanathan said, “Over the past three years, since it (MFI) is a relatively low-risk business with good repayment track record, banks, business correspondents of banks and NBFCs (non-banking finance companies) have also started lending. Hence, there is a plethora of people lending now. Borrowers are also getting unsecured loans through formal channels now. Since, there are consumption needs and hence demand for such loans, there is a structural problem of excess or over lending.”

According to her, micro lenders must also change the way they form joint liability groups (JLGs), a group of 4-10 people of same village/locality who mutually come together to form a group to guarantee the loan, taken by a member of the group, without any collateral.

“The way we form JLGs needs to change…I think it has to be more responsibly rather than randomly. We need to do actual assessment of households we lend to and how much income they are generating, whether they will be able to service the loans without putting stress on the entire household. Again that is an expense but then we have to give a little to get more. Obviously charity model doesn’t work but it has to be creation of shared value and we have to be practical,” she said.

Unlike the self-help groups (SHGs), where there is a common enterprise and then a common group of women is formed, who get together to build a business and have a livelihood, JLG model is driven by a private enterprise and takes the liability of the group just signing a guarantee and taking a pledge. “But the assessment is based on self-certification of the borrowers and hence high risk business,” Vishwanathan adds.

On Tuesday, MFIN adopted a Mutually Agreed Code of Conduct for micro credit providers to control excess lending to a borrower thereby limiting the risk of increase in non-performing assets (NPAs).

The code of conduct addresses a part of this “structural flaw” by capping per customer lending at Rs 60,000 and restricting loans to one customer beyond three lenders. At present about 10 lenders including banks such as IDFC Bank, Yes Bank are on board along with four small finance banks – Disha, ESAF, Suryoday and Janalakshmi have given consent.

MFIN is also seeking staggering of provisions towards bad loans for three years from the Reserve Bank of India as it will impact their capital requirements of 15 percent.

According to RBI norms, MFIs need to set aside 50 percent of a loan that’s overdue between 90 and 180 days to cover the risk of default. For loans that are overdue for more than 180 days, they need to set aside the entire loan amount.

In the aftermath of the November-December demonetisation exercise, local politically connected people have misled borrowers in some areas of Maharashtra, Uttar Pradesh, Madhya Pradesh and Kerala that their loans had been waived, leading to a sharp drop in loan recoveries. Even as the repayments have come back to its previous record of 99 percent, select regions such as Vidharba and pockets of states with farm loan waivers are still witnessing delayed payments.

Industry experts say MFIs could bear 8-10 percent credit cost on their total loan portfolio in this financial year, hurting their profit margins.

RBI Deputy Governor, NS Vishwanathan on Tuesday hinted that the days of regulatory forbearance with respect to NPAs are over and the microfinance sector has to grow on the basis of its own strength.

Although the sector does have investors, the overall MFI industry will require Rs 1,500 crore in the form of equity and over Rs 20,000 crore in the form of debt capital on a conservative growth estimate of 25 percent.

The MFIN chief is hopeful that the new code of conduct will help banks, MFIs, small finance banks and other lenders look at it in a sectoral way to reduce the potential stress that can be created with the increasing credit scenario with multiple lenders entering the fray.