Jan. 20: After putting up a united fight against the Andhra Pradesh ordinance on the MFI sector, microfinance companies are divided over the RBI-appointed Malegam committee report, which was released on Wednesday. While industry leaders such as SKS and Spandana Spoorti have welcomed the recommendations as forward looking, smaller players have opposed some measures, especially a 12 per cent cap on margins.
Doing a fine balancing act, industry lobbying body Micro Finance Network (MFIN) called the report balanced, but said it has to engage with the RBI on certain issues such as definition, margin cap and family income as an eligibility criterion. “It would be a challenge for small MFIs to rejig their pricing to meet margin and interest rate cap. So we feel that smaller players need to be given some more time to comply with it,” said M-FIN chief executive officer, Mr Alok Prasad.
The country’s largest mirco lender SKS Microfinance claimed it will have a minimal impact of 120 basis points on margins. The company has already slashed its effective interest rate from 30 per cent to 24.7 per cent. “These regulations will not have much impact on us. But if somebody doesn’t have enough capital, it might affect them,” claims SKS chief financial officer, Mr S. Dilli Raj.
Initial market reaction too was euphoric as SKS stock price jumped by 13 per cent in the morning trade on the Bombay Stock Exchange (BSE). But it shed its gains in the evening to close at Rs 694.25, just 3.84 per cent higher than the previous day’s closing.
Analysts, however, differ with SKS. They point out that SKS will also be affected by the 10 per cent cap on margins. At the time of its IPO, the company’s net margin — the difference between its cost of funds and what it charged from borrowers, was 15-16 per cent, says an analyst who had tracked that IPO. If margins are capped at 10 per cent, the company will find it tough to deliver the performance it had shown in the earlier years.
According rating agency CRISIL, the recommendations, if implemented, will pose additional operating and compliance-related challenges for MFIs and growth prospects and profitability will weaken.
The industry majors, however, have a reason to rejoice. The exit of the small players would lead to further consolidation of the sector, where just 44 micro lenders account for around 85 per cent of the Indian market.