The microfinance industry in India, which was strongly commanded over by private players, could

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now see options like the creation of a government agency either directly as an NBFC for micro credit, or through the network of regional rural banks.

This option is yet largely unexplored but could help address the challenges of private equity in MFIs and also provide the right backing in terms of infrastructure and finance to help ensure maximum penetration of services, Wolters Kluwer Financial Services India said in their recent report.

It is observed that private equity players are shying away from this sector since the Andhra Pradesh crisis and the ensuing central legislation. The future of micro credit industry, which is currently at crossroads, may henceforth see an up tick in government-backed institutions too.

“However, there is a need for it to move from pure micro lending to ‘micro financing’ thus, bringing in more products like insurance and securities among others, to be more inclusive in nature,” said Prabhat Gupta, head regulatory specialist, Wolters Kluwer.

Also, according to the report, with all the regulation and legislation being proposed for the sector, there may be a large-scale consolidation in the offing. Smaller players with lesser capital may either shut shop or be acquired by larger MFIs. Reckless growth, observed until now, will end as players with short-term profit objective will shy away.

The Malegam Committee of Reserve Bank of India has recommended a minimum net worth of Rs 15 crore for MFIs and not less than 90 percent of the total assets in the form of qualifying assets, margin cap depending on size of loan portfolio and an individual loan cap for borrowers along with transparency in interest rates charged.

“Which means MFIs would need more capital and one way to raise capital would be by consolidation in the MFI sector. Also, consolidation could lead to lesser number of branches and decrease the cost of compliance,” said Gupta.

The report further says that among the major reasons for the crisis in the MFI sector was the multiple lending to borrowers by different MFIs, much beyond the repaying capacity of the borrower, thus increasing his indebtedness.

“Consolidation amongst the MFIs would be one method to reduce the risk of multiple lending to a borrower,” he said adding that there are economies of scale to be had for the bigger MFIs too. Hence, wherever beneficial, they too could pursue consolidation.

Meanwhile, with the suggested changes of the Malegam Committee being implemented in the days to come, the MFI sector would continue to remain profitable. “Given the likely reduction in Non Performing Assets, better credit quality and the overall thrust towards financial inclusion by the regulator, the MFI sector should in future, continue to attract private equity,” said Gupta.

However, he said, the investors should consider guarding against being greedy for short term gains in this sector which led to the current crisis and look to a longer term perspective for market capitalization.