Budget 2023: Microfinance lenders pitch for flexibility in inclusion schemes, tax relaxations and lower borrowing costs

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Microfinance institutions (MFIs) are hopeful that Budget 2023 will offer certain relaxation in tax rules, help the industry lower borrowing costs and ease rules on operations.

MFIs are institutions that source money from banks to lend to smaller clients at a margin. These lenders typically cates to the low-income borrower group including micro, small and medium enterprises (MSMEs) and retail borrowers.

Rising cost of funds

MFIs have been witnessing an increase in borrowing costs in recent months. The Reserve Bank of India’s (RBI) Financial Stability Report for December 2022 showed that alongside stable credit and loan growth, the microfinance sector experienced an increase in the stress level of the loan portfolio.

In February 2022, the borrowing cost for MFIs rose from 200 basis points (bps) to 400 bps. Moneycontrol in May last year reported that the hike from the regulator prompted some MFIs to hike their lending rates due to which borrowers had to pay more. Generally, major MFIs charge interest in the range of 18-22 percent but it changed after the rate hike.

Credit bureau CRIF High Mark in June 2022 showed that about Rs 24,500 crore of loans remained unpaid even after 180 days of the due date. This largely resulted in driving credit costs higher for all microfinance lenders which to some extent impacted their profit numbers.

Concerning the issues with the borrowing costs, Sa-Dhan, the industry body for MFIs, highlighted the rising non-performing asset (NPA) numbers.

"About 12 percent of the overall microfinance loans of Rs 2.76 lakh crore have remained NPAs at the end of June 2022 despite improvement in overall repayment collection," the industry body said in a report.

Sa-Dhan Executive Director Jiji Mammen noted, "Though funds flow to the sector has improved, some smaller microfinance institutions find it difficult to access funds from banks. We are working towards removing this gap."

Microfinance companies' loan book stood at Rs 3 lakh crore as of September 2022, increasing by 23 percent from last year, showed RBI data.

In the wake of an increase in lending demand for microfinance companies, lenders are of the view that the budget should work on providing more flexibility for them in inclusion programmes.

"We would also appreciate the increase in the limit of credit guarantee schemes and funds for MFIs under National Bank for Agriculture and Rural Development (NABARD), which will help the MFI sector strengthen its credit lending facilities," said HP Singh, Chairperson, Sa-Dhan.

“Designing programmes like CGTMSE (Credit Guarantee Fund Trust for Micro and Small Enterprises) and Credit Guarantee Fund for Micro Units (CGFMU) to suit the inclusion objectives will enable millions of micro and small businesses to avail growth financing,” said Alok Mittal, CEO, Indifi Technologies, a digital lender.

Singh added that to facilitate the microfinance sector, Small Industries Development Bank of India (SIDBI) can be utilized as a body for government allocation of funds, which will reduce the reliance of Non-Banking Financial Companies (NBFCs) on banks.

“The current credit guarantee programmes like CGTMSE and CGFMU are limited either by an interest rate cap of 18 percent or by a minimum BBB+ rating for the lender. These criteria tend to filter out the inclusion-driven younger lenders,” Mittal pointed out.

Tax regulations

Microfinance bodies in India have been crucial in providing credit to informal and other sectors that were largely unserved by bigger lenders.

These companies mostly target the informal sector and have been crucial in helping the poor and financially illiterate to reduce their susceptibility to external shocks, improve income, and build feasible businesses.

Highlighting measures to improve credit delivery from their end, industry experts said that tax regulations could be a major thing that the budget could include.

"Improving various aspects of taxation associated with startups, like taxing ESOPs (employee stock ownership plans) at the time of liquidation, reduction of MAT (minimum alternate tax), and creating incentives for angel investors to invest in high-risk ventures are some things we expect from the budget," said Aditya Kumar, co-founder and chief executive officer, Niro, a digital lender.

Singh said that creation of a separate corpus for MFI lenders would be another demand from the budget.