RBI guidelines should improve profitability, but regulatory jurisdiction remains unclear
Growth prospects for microfinance institutions (MFIs) will remain subdued over the medium term. Operating challenges arising from the Reserve Bank of India’s (RBI’s) recently issued guidelines for MFIs, coupled with expected difficulty in raising capital, are likely to trigger consolidation in the sector. However, RBI’s guidelines should ease pressure on MFIs’ profitability, as it has relaxed some onerous recommendations of the Malegam committee.
Furthermore, the continuation of priority-sector status and steps to enhance transparency and governance should improve stakeholder confidence and enable resumption of bank funding. CRISIL also believes that clarity on regulatory jurisdiction for MFIs is a critical next step for long-term sustainability of the sector.
Ms. Rupali Shanker, Head, CRISIL Ratings said “The MFI sector’s growth is likely to remain subdued over the medium term, especially in regions with high microfinance penetration, because of proposed regulatory restrictions on multiple lending, loan size, and end-usage of loans. This will provide an impetus for consolidation in the sector.” To comply with the new regulations, MFIs will have to enhance the robustness of their internal systems and processes, strengthen their monitoring mechanisms, and invest in training their employees.
Ms. Shanker further added that “ CRISIL also expects RBI’s recent guidelines to provide cushion to MFIs’ profitability, and enable resumption of bank funding to MFIs.” RBI’s guidelines are largely based on the Malegam committee recommendations, with some modifications: RBI has allowed a higher cap on interest rates and margin (of 26 per cent and 12 per cent respectively) and has clearly defined the manner of computation for these caps.
RBI has also increased the limits on annual income of borrower households, enhanced the maximum ticket size of loans, allowed a higher limit on indebtedness of borrowers, and reduced the minimum threshold to qualify as an MFI. Moreover, RBI has retained the priority-sector status for bank loans to MFIs, a critical enabler of resource flows to the sector. Financial risk profiles of MFIs with significant operations in Andhra Pradesh are likely to remain under considerable stress because of continued low collection rates, liquidity pressures, and expectation of substantially high credit costs over the medium term. Substantial improvement in recovery rates and timely restructuring of these MFIs’ bank loans will be critical for their survival.
Mr. Pawan Agrawal, Director, CRISIL Ratings, said, “However, regulatory jurisdiction for MFIs remains unclear. While RBI has created a new category of non-banking financial companies to regulate the MFI sector, multiple regulators continue to oversee the sector. A clearer regulatory framework will remain critical to instill greater confidence in the sector.”
CRISIL will continue to monitor developments in the MFI sector and their impact on the credit risk profiles of the entities rated by it.