Subdued growth may trigger MFI mergers

Chennai: Growth prospects for microfinance institutions (MFIs) will remain subdued over the medium-term. Operating challenges arising from RBI’s recent guidelines for MFIs, coupled with expected difficulty in raising capital, are likely to trigger consolidation in the sector. However, RBI’s guidelines should ease pressure on MFIs’ profitability, as it has relaxed some recommendations of the Malegam committee, a Crisil research said. Furthermore, the continuation of priority sector status and steps to enhance transparency and governance should improve stakeholder confidence and enable resumption of bank funding. It is believed that clarity on regulatory jurisdiction for MFIs is a critical next step for long-term sustainability of the sector, the research said. Rupali Shanker, head, Crisil Ratings, said, “The MFI sector’s growth is likely to remain subdued over the medium-term, especially in regions with high microfinance penetration, because of proposed regulatory restrictions on multiple lending, loan size, and end-usage of loans. This will provide an impetus for consolidation in the sector.”  To comply with the new regulations, MFIs will have to enhance their internal systems and processes, strengthen their monitoring mechanisms, and invest in training their employees, she added. “Crisil also expects RBI’s guidelines to provide cushion to MFIs’ profitability and enable resumption of bank funding to MFIs. RBI’s guidelines are largely based on the Malegam committee recommendations, with some modifications: RBI has allowed a higher cap on interest rates and margin (of 26% and 12%, respectively) and has clearly defined the manner of computation for these caps,” she said. Pawan Agrawal, director, Crisil Ratings, said, “The regulatory jurisdiction for MFIs, however, remains unclear. While RBI has created a new category of non-banking financial companies to regulate the MFI sector, multiple regulators continue to oversee the sector. A clearer regulatory framework will remain critical to instill greater confidence in the sector.”