Micro-Finance Apex Body wants MFIs to cut lending rate

[DC]

Hi Guys,

Today, we have an article in the ET, where SA-Dhan (the apex
organization of micro-finance institute (MFIs) and self-help group
(SHG) asking them to cut lending rate. The lending rate currently
charged by MFIs are in the range of 20-22% and they banks lend them @
10-12%.

Will it be financially viable for MFIs to cut their lending rate, as
this industry surfer from high cost from distributor, who actually
makes the recovery possible and involved in the due diligence process
too.

Can some of you even share some view on the whole industry as a whole
as it looks to be heading towards a bubble. (This may be bust
anytime).

(One more fact remains that not many banks are willing to give them
Working capital Limit , all they give is term loan facility – for the
obvious reason)

Nice to be back in this forum after a long time.

Cheers
DC

[Karthik Prasad]

Hi,

Following are the key points/ concerns from my end

1) The way in which MFIs came into operations or transformed into a legal entity is a great concern. To give a background

    about the subject. MFIs initially started operations as a not for profit. The profits generated can only be invested in other 

    not for profit and no cash can be removed out of the system. In lieu of this most MFIs started converting themselves as

    an NBFC. The bring the initial capital needed to for the legal entity, MBTs(Mutual Benefit Trust) were formed. The funds of the

    not for profit is given to the common people to form the trust and then the trusts' invest to becomes the shareholders of the NBFC.

    Once the operations of MFI stabilizes the promoters bought out the MBT at less than the face value.

2) The industry is operationally intense. A typical field officer can at the most cover only 400 people/ borrowers. 

    At the branch level the coverage is 4500 with a total of 6 staff.

3) The operational performance of MFIs is far superior with respect to any other NBFCs. The flow of information is very quick and the 

    collection data are available on hourly basis.

   

   Due to the points 2 & 3, the operational cost to income ratio is as high as 50% in few MFIs.

4) The question " who are the promoters" is gaining prominence because in many cases the initial promoter have cashed out or

    diluted his holding during the PE funding process. The DRHP of the SKS states that Sequoia and a few other 

    PE players as promoters. Will the business continues to flourish with social cause is a big question going forward.

5) Its makes sense for the banks to provide MFIs with the term loan rather than working capital loan is because of the very nature

    of MFIs loan disbursement, high churn rate (MFIs common loans are for a duration of 4- 8 weeks)

   

Even with these concerns i am not totally convinced that the theme is any bubble. The investors interest in MFIs is enormous and many have lined up to take exposure in this sector. MFIs are here to stay but the social cause will be given a skip.

Regards

Karthik

    

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[MURUGAVEL]

A couple of points

a) I dont believe that there is any 'social' or 'gender' benefit that drives the biz. It is purely commercial ( at least at present and likely so in future) and the preference to lend to women is just because recovery is better and peer pressure works better
b) There have been concerns in the recent past about the way recovery is being handled. Private bank recovery agents are begining to look like saints !
c) The ROA of the key MFIs in India is around 4% and is significantly higher than firms in other geographies - and in any case much higher than that of banks in any geography.
...it is true that they are digging up the fortune at the bottom of the pyramid.

--
J.Murugavel
Bharathidasan Institute of Management
PB No 12, MHD Campus, BHEL Complex
Thiruchirapalli 620014
Hand phone: 93633 14015 / 96986 37776

[DC]

A couple of points to substantiate on the comments I made to start
this discussion.

Banks are not giving working Capital facility to MFIs
as WC limit generally becomes perpetual in nature (Unlike the Term
Loan where you know the exit date)

MFIs is growing at a very high rate but the number of
lending they are lending to have not in line with the growth in the
advances.

One Example of this – Customer who currently owns, say Rs. 20,000 from
MFIs will be incentives to go for higher amount of loan after the
successful repayment of the first loan. Hence, he need to look for
other means of business to start earning higher and at the same time
he has to pay a very high interest to MFIs too.

Does this create a problem of bubble in the industry as whole?

I guess it does and which may lead to problem in the whole sector as
such.

Plz do correct me and share your view points.

Cheers
DC

[MURUGAVEL]

Hi DC,

more points ...the average lending rate , along with all costs hovers around 25% effectively. That is the cost of borrowing. Wonder how many biz exist that can have an IRR greater than 25% - for long term !
Circularization of funds is also a problem - when a borrower borrows from one MFI to repay another .....

Regards,
Murugavel

----- Original Message -----
From: DC <deep...@gmail.com>
To: BIM_Finance <BIM_F...@googlegroups.com>
Sent: Mon, 6 Sep 2010 13:20:48 +0530 (IST)
Subject: Re: Micro-Finance Apex Body wants MFIs to cut lending rate

Cheers
DC

--

[Karthik Prasad]

A couple of clarifications...

@DC : MFIs is growing at a very high rate but the number of lending they are lending to have not in line with the growth in the
advances.

The point is perfectly valid. But the quantum of raise is very minimal. In cases where the quantum is high the borrowers

(Business Loan) are required to substantiate/ furnish their changing business needs. I have spoken with one of the operations 

head, he said that the loan level increase are generally not encouraged and the applications are reviewed stringently.

@Sir : Circularization of funds is also a problem - when a borrower borrows from one MFI to repay another

This was a point of concern among lot of investors. To address the concern/ issue the industry has formed Alpha (a sort of credit bureau) where the information about the area of operations/ borrowers is exchanged. The initiative is in the nascent stage.

At the operational level every MFIs use group pressure to address the concerns of circulation informally.

Regards

Karthik