The microfinance sector is set to move into the next level by creating a self-regulatory mechanism to check unethical business practices. The interest rates charged by microfinance institutions (MFIs), however, are likely to remain at an average of about 26% due to the non-availability of cheaper funds and various other reasons, Vijay Mahajan, president of the Microfinance Institutions Network and chairman of Basix, tells K V Ramana. Excerpts:
The microfinance sector has been facing several allegations over ill-treating borrowers or charging high interest on loans. How are you handling the situation?
There were some such incidents earlier. Now, we have come together under the Microfinance Institutions Network (MFIN), a self-regulatory body. We are forming a code for member institutions. About 80% of the microfinance market is under NBFCs, which are obviously for-profit companies. The balance is with NGOs, co-operatives, etc. All 39 members of the network are NBFCs. Since we have a large part of the market, there is a need for us to regulate ourselves in the interest of the sector.
What is the size of the market that is tapped by MFIs and what are your targets?
Currently, there are about 25 million microfinance customers across the country and about Rs 24,000 crore worth of loans have been given out to poor and very poor individuals. We have a target of providing inclusive financial services to 100 million low-income households by 2020. Our motto is to be an engine of inclusive growth in India.
What are the constraints the sector faces?
MFIs are not allowed to accept deposits from the public. So there is a lack of funds and we have to depend on bank loans only. Product diversification is also a key challenge we are working on.
Microfinance firms are always seen charging significantly high-interest rates and on default, it is said that they follow unethical practices to recovering the money. What is the truth here?
The average rate charged by most microfinance companies is about 26%. It might look high, but there are reasons for charging this rate. We get loans from banks to re-issue them to the beneficiaries. Banks charge us about 13% on average. We employ significant manpower, primarily at the field level and currently, we have about two lakh people working in the sector. Salaries cost us about 6.3% and overheads in the form of office and other facilities cost about 3.2%. We make a profit of about 2%, while we provide about 1% for the loan loss. This math brings the average rate to about 26%.
Can’t rates be lower?
No, not at this point. There is no point on which we can cut the cost to pass it on to the borrowers. However, if we are able to get loans for at a lesser rate, we will bring down our rates. In some cases, there were loans that were given at less than the average rate. There are indications of rates coming down, but for it to become a trend, we need to see our costs going down. Banks were not lending to this sector till recently. So, since we are not allowed to accept deposits, we have to look for other options of raising funds. As an industry, we don’t want to depend on subsidies or grants.
Apart from simple loans, what else are you planning to offer?
We are looking at products like micro-home finance, education loans, agriculture loans, etc. We are also working on changing the repayment cycle from weekly repayments to possibly a monthly repayment system.
But, a home loan offered by you at 26% would definitely be unviable since these loans are normally for the long term?
For home loans, the rate need not be 26%. We are planning to talk to the National Housing Bank (NHB) for funds. The NHB might raise funds for us by issuing bonds and give us loans at a cheaper rate, which will be passed on to customers. Similarly, the repayment tenure will not be 10 or 15 years. It will be less than that.
How about discipline on the part of members? Are you doing anything on that?
Yes, we are preparing a code of conduct and we are forming committees to enforce that. While the objective is to make the system transparent, we will also focus on the conduct of the member companies. Every complaint regarding any transaction will be handled seriously. If we are unable to resolve it from our side, we will inform the regulator.
How about defaults on part of the borrowers?
Luckily, there are not many defaults. The recovery ratio is the maximum in this sector. There are certain borrowers who had repaid their loans after three years. Normally, our borrowers are poor or very poor. They take loans for setting up a tea shop or a cycle-repairing shop, etc. They need money for these activities continuously and they know that they have to repay to continue getting loans. But, there are some cases of field executives resorting to certain unacceptable methods for recoveries and we are going to keep a check on that. Moreover, we are setting up a limit for loans. No borrower will be able to get more than Rs 50,000 from a maximum of three MFIs. If a fourth company offers him a loan, it will be against the code of conduct. For borrowers, we are putting in place a credit rating system. But, over the years, we have noticed that willful defaults in the microfinance market are too less. There are defaults either due to drought or due to the borrower’s small business running into losses, etc.
Don’t you think limiting the number of companies offering loans would create entry barriers for new MFIs?
No, there is a market for many companies. For instance, in Uttar Pradesh, there is a demand for Rs 52,107 crore while the supply of funds is at just Rs 741 crore. In Maharashtra, the demand is Rs 37, 412 crores and supply is at Rs 556 crore. Andhra Pradesh leads the market with a maximum supply of funds. Still, as against a demand of Rs 28,974 crore, the supply is just Rs 3,523 crore. New players are being encouraged to look at untapped households rather than lending to only existing beneficiaries.
