Reserve Bank of India regulation for the microfinance industry has prompted several microfinance institutions to reevaluate their strategies and either shut down their operations or move into different parts of the financial services value chain. The recent RBI rules stipulate that microfinance clients cannot have total indebtedness of over approximately $1,000. This has led to some microfinance institutions exploring different market segments, such as borrowers who require over $1,000. Since such borrowers do not fall into the ‘micro loan’ category, but often have difficulty in obtaining funds from mainstream banks, they present microfinance institutions with a new untapped opportunity.
Stringent Reserve Bank of India (RBI) rules and a clampdown on profits have prompted a number of microfinance institutions (MFIs) to move out and/or move up the value chain. If some are devising innovative ways to come out of the MFI space, bigger players like SKS that plan to remain within are planning a “strategic redirection” to stay afloat.
In the last six months, at least two MFIs have approached the umbrella body Microfinance Institutions Network (MFIN) with a proposal to move out, as they plan to serve a new segment of borrowers in the Rs 50,000 to Rs 5 lakh bracket. This way, the MFIs would no longer be guarded by the RBI regulation governing the MFI sector, but at the same time be able to cater to a huge untapped market. The two MFIs are targeting an entirely new segment, consisting of small entrepreneurs, traders, kirana stores, artisans, fabricators and small service providers.
SKS, on the other hand, is planning to expand its business by augmenting other verticals in the rural sector, while remaining an MFI.
Dilli Raj, chief financial officer, SKS, said the company would announce the new business model on Wednesday. “The sector is going through rapid changes. We will make an announcement on new business model, taking into consideration factors like consolidation and new regulatory guidelines,” said Raj. “We will continue to remain an MFI,” said Raj.
After mass defaults in Andhra Pradesh due to a state legislation curbing operations of MFIs, the RBI had constituted the Malegam committee to examine regulations governing the sector. Yesterday, the RBI introduced MFIs as a new category of non-banking finance companies, stipulating the institutions should have an aggregate margin cap of not more than 12 per cent and interest on individual loans should not exceed 26 per cent per annum, calculated on a reducing balance basis.
“Between the ‘micro’ and the ‘small’, there is a segment which can be described as ‘mini’. This segment — small entrepreneurs, traders, kirana stores, artisans, fabricators, service providers, etc —need loans in the range of Rs 50,000 to Rs 5 lakh. The mainstream banks are, for the most part, not catering to the funding needs of this category of borrowers.
We must also recognise that this market is economically vibrant, provides employment to millions of people and needs to be fully supported by the formal financial system. Also, it is not subject to RBI’s microfinance regulations,” said Alok Prasad, CEO, MFIN.
Adding: “Under the May 3 RBI guidelines, with the imposition of margin caps and interest rate ceiling, for many MFIs it has become extremely difficult to stay profitable. Hence, they want to examine all options for dealing with the new reality. Offering non-microfinance products can be one way forward,” said Prasad.
Vistaar, a Bangalore-based NBFC, used to be an MFI till a few months earlier, terminated its microfinance operations recently to avoid the fallout of the RBI regulations. “We changed our lending profile and business model after the crisis. Now, we are serving clients in need of loans up to Rs 10-25 lakh,” said Brahmanand Hegde, one of the promoters of Vistaar.