Shares of SKS Microfinance today advanced by 13 per cent in the morning trade on the Bombay Stock Exchange (BSE), buoyed by relaxed restructuring guidelines issued by the Reserve Bank of India yesterday. The central bank had yesterday relaxed debt restructuring norms for the microfinance sector to enable banks to provide liquidity support to the crisis-ridden micro finance institutions (MFIs). Boosted by the move, shares of SKS shot up by 13 per cent to touch a month's high of Rs 756 on the BSE. On the National Stock Exchange, the Hyderabad-based firm zoomed 13 per cent to an early high of Rs 757. "The movement in the stock is news driven... The RBI's move will help the entire microfinance sector to strengthen their structure," Ashika Stock Brokers' research head, Paras Bothra, said. An RBI committee had also suggested that MFIs be allowed to charge a maximum interest of 24 per cent on small loans which cannot exceed Rs 25,000. The committee, headed by Reserve Bank's central board director Y H Malegam, also pitched for creation of a separate category of non-banking financial companies (NBFC-MFI) for the micro finance sector. Meanwhile, the BSE barometer Sensex was trading at 18,860.19, down by 118.13 points at 10:06 hrs.
The Malegam committee, set up by the Reserve Bank of India (RBI) to chalk out a framework within which microfinance institutions (MFIs) in India should operate, is set to recommend an upper ceiling for interest rates chargeable to poor borrowers, two persons familiar with the development said. The panel also seems to be in favour of bringing in all for-profit microlenders under RBI regulations. The committee is in the process of finalizing the report and may submit it to the central bank next week. What the ceiling on the lending rate for MFIs could be is not immediately known, but persons familiar with the matter said it will be “reasonable”.
The panel, they said, is basing its recommendations on a Basel committee report that tweaks principles of banking supervision to suit regulation of MFIs. It also offers a view of the policies which banking supervisors of some countries have adopted with respect to microfinance. The Basel committee is a panel of banking supervisory authorities established by the central bank governors of 10 countries in 1975. Currently, it consists of senior representatives from the bank supervisory authorities of 27 countries, including India. Apart from recommending a ceiling for interest rates, the Malegam panel also wants to make it mandatory for all “for-profit” lenders and MFIs that operate as non-banking financial companies (NBFCs) to provide a threadbare calculation of their cost of operations, including cost of funds and the spread, or the difference between what they spend on mobilizing money and what they earn deploying the money in the form of tiny loans.
According to Chandra Shehkar Ghosh, chairman and managing director of Bandhan Financial Services Pvt. Ltd, one of the top five MFIs by assets, a potential capping of interest rates will not make much difference to the larger players who have already scaled down rates, but it will affect the newer and smaller entrants.
“Any such ceiling will compel smaller players to defer costs as they can no longer build it into the interest rates charged to borrowers beyond a limit. Now, small MFIs will first look to build scale before incurring costs,” Ghosh said. SKS Microfinance has, with effect from 11 January, cut its loan rates across India to 24.55% from 28-31%. The Basel paper, on which the Malegam committee is modelling its report, clearly demarcates the permissible activities and licensing criteria for MFIs from other financial services companies that are into traditional retail lending. “The types of permissible microfinance activities, including microcredit and microsavings and microinsurance, should be clearly defined in laws or regulations and tied to the size of the institution and its ability to manage risks inherent with such products and clients,” the report states. Similarly, with respect to the capital adequacy ratio for MFIs, the report suggests that where companies have fewer options to raise capital compared with banks, “or exhibit a more pronounced risk profile, a proportionately higher capital adequacy ratio may be warranted”.
The report also says that regulators might consider tailoring large exposure limits to the distinctive risks in geographic or sector concentrations often observed in microloan portfolios and across different institutions, “without unduly penalizing otherwise sound practices”.
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