The MFI sector in India continues to face high regulatory risk with the government yet to clearly spell out how it plans to regulate the fast growing micro finance sector.
The Chairman of National Bank for Agriculture and Rural Development (Nabard), U.C Sarangi has said that NABARD favours a stringent regulatory framework for the sector in view of the high rates of interest charged by some micro-finance institutions (MFIs). However, the bank does not want to put a limit on the Interest rates that can be charged by Microfinance Institutions.Speaking to the media Mr Sarangi said that it is high time that Microfinance Institutions reduce their interest rates, particularly if the MFI movement in the country is to continue. Sarangi also added that according to a recent study, the top five MFIs in the country reported an average return on assets of about 4.3 per cent, as against about 1.7 per cent globally. This shows that there is room for a cut in the Interest Rates charges by the bigger and highly profitable MFI’s.
NABARD’s chairman also added that while the operating expense ratio of MFI’s in India had come down to about 11 per cent, the yield on advances has been as high as 33 per cent for some MFI’s. Thus, margins were as high as 20 per cent for most MFIs in India..
The Reserve Bank of India had also expressed concerns over high rates charged by MFIs in a meeting held with industry leaders early this year and had hinted that the sector could lose ‘priority sector lending status’ if MFI’s did not improve their levels of governance.
The NABARD Chairman also added that he felt that self-help groups were a better alternative to MFIs, as the profits were ploughed back for disbursing fresh loans rather than being siphoned away by private equity firms and over paid managements.