Malegam proposals will weaken small MFIs, say experts

The recommendations of the Malegam committee, if accepted by the Reserve Bank of India (RBI), will be a positive step towards enhancing stakeholder confidence in the microfinance institution (MFI) sector — a critical element for long term sustainability of the sector — but once implemented, these proposals will pose additional operating and compliance-related challenges for the MFI sector, experts said. The sector’s growth prospects and profitability will weaken, thereby leading to a possible consolidation in the industry. The decline in the gross interest spreads of the top five MFIs is expected to be in the range of 5 to 8 per cent, over the medium term. Consequently, rating agency Crisil foresees a possible consolidation in the MFI industry with higher minimum net worth norms which will raise the entry barrier for new MFIs. “Smaller MFIs will find it difficult to raise capital, given the challenges of lower growth and profitability. MFIs with stronger internal processes, higher focus on transparency and governance, and efficient operations will reap the maximum benefits,” it said.