RBI’s tweaked interest rates offer relief to smaller MFIs
Feb 12 2014 , Hyderabad
Small and medium sized MFIs contribute around thirty per cent of the total industry size, and are expected to spurt a ten per cent growth over and above the usual growth rate. “The RBI’s move will definitely see at least ten per cent growth for small and medium MFIs, which is over their natural growth. It would enable a variety of MFIs to deal with the reality of cost of funds,” said Mathew Titus, executive director of Sa-Dhan. The total industry is estimated to be around Rs 30,000 crore.
Sa-Dhan is an association of Community Development Finance Institutions, which has membership of 60 such MFIs.
The Reserve Bank’s latest recommendation allows MFIs to charge interest rates to their borrowers based on the average base rate of the five largest commercial banks by assets, multiplied by 2.75 or base rate added to ten per cent margin.
Prior to this, there was a cap of 26 per cent on the interest rates. So typically, if a small or medium company has cost of funds between 16-17 per cent, they could arrive at an interest rate of around 27 – 29 per cent, charging more than 26 per cent.
“For bigger MFIs it would not make much of a difference. Like for instance, Ujjivan’s cost of funds are 13.5 plus 10 per cent margin. In any case going forward there will be higher growth and with small and medium getting this leeway, it could be better than the usual too,” said Samit Ghosh, president of industry body MFIn and chief executive officer of Ujjivan Microfinance.
In 2010 the small and medium companies were roughly around 200, but the number halved after the AP crisis struck. Most of the companies refrained from reporting then. Small MFIs roughly have clients less than 50,000 and medium ones between 50,000-2,50,000.
“The move proves positive for small and medium ones and could help contain losses. Outside Andhra Pradesh, the industry is now flourishing,” said Dr Divakar, vice-president, SKS NGO.