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Aug 06, 2012, 04.14 PM IST
The Reserve Bank of India has relaxed guidelines for all non-banking financial company-micro finance institutions (NBFC-MFIs). In an interview to CNBC-TV18, Ramesh Ramanathan, chairman of Janalakshmi Financial Services analyses the new guidelines.
The Reserve Bank of India has relaxed guidelines for all non-banking financial company-micro finance institutions (NBFC-MFIs). The RBI has allowed MFIs to charge more than 26% as interest rate on loans given to borrowers. The central bank has also given MFIs five years to make full provisioning against bad loans.
In an interview to CNBC-TV18, Ramesh Ramanathan, chairman of Janalakshmi Financial Services analyses the new guidelines.
Below is the edited transcript of his interview with CNBC-TV18's Latha Venkatesh and Ekta Batra.
Q: The RBI’s relaxations are not very large. Is all this enough to ensure that the industry turns the corner and starts growing?
A: The industry has actually turned the corner. There is enough evidence of that. MFIs clearly don’t have a presence in Andhra both in terms of investor interest and bank liquidity. A lot has changed over the last three-four months.
The current circular on August 3 from the RBI, building upon the December 2 circular, highlights a few things. I want to make a couple of strategic points. First, what the RBI is showing through the circular is that they are very much in tune with what the industry is feeling, what the operational reality on the ground is and are willing to take the steps to tweak the regulatory operating environment based on what they are hearing from the ground. I think that’s a very positive step.
Few other positives in the circular are as follows. The borrowers have to be doing self certification. So, this is an important operational consideration. Second, they have reiterated that every NBFC, MFI needs to be a member of a credit information company or CIC and part of atleast one industry body, a self regulatory organisation. Again this is a very important clarification that the role of the banks, when they are lending to MFIs like us, is restricted now only to ensuring that our procedures and our loan covenants are in compliance with the regulatory requirement. So, the burden of proof is no longer as high on the banks. It remains now with primarily with the NBFC, MFI price. These are all important operational clarifications that were necessary.
The point about the interest rate relaxation, I think one needs to understand how this works through. There are two points of concern for us in the new circular, for some of us who are running larger MFIs above Rs 100 crore. The first is they have reduced the margin cap from 12% to 10%. But they have also allowed this buffer range of 4%, the rate at which we can lend from 26%. Now if we interpret this correctly, you can lend up to 30%, so long as you retain your margins at 12% for smaller MFIs and 10% for larger.
And our submission would be, even at 12%, this is hard enough to generate good returns on capital, return on assets as well as return on equity. Therefore, it might act as constrain for us to be able to operate with a meaningful amount of profitability. So, we will have to make a case back to the RBI and take forward.
Q: How is the non-Andhra Pradesh portfolio doing?
A: Janalakshmi has no presence in AP at all. There are number of large MFIs in the industry like Ujjivan, Equitas, Bandhan, which is the largest microfinance institution, none of us have a significant presence in AP. All of us have portfolios that are extremely strong and growing. And portfolio quality, for Janlakshmi, is over 99% in terms of on time recovery.
Clearly, we have demonstrated that is the essential principle of microfinance, which is high credit quality at a very good operating cost, can be continued and preserved. The external event of AP has affected AP MFIs, but it is an isolated incident.
Tags: MFIs, micro finance institutions, non-banking financial company, Reserve Bank of India, Ramesh Ramanathan, Janalakshmi Financial Services
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