Microfinance Finds Favour with Regulator for Financial Inclusion - India Ratings

Mumbai, April 15, 2015: The Reserve Bank of India (RBI) through its recent policy announcement has shown confidence in microfinance institutions’ (MFIs) role in financial inclusion, opines India Ratings and Research (Ind-Ra). Also, the proposed guidelines indicate that MFIs have bettered their risk management and underwriting ability after the Andhra Pradesh crisis. The regulator has proposed to widen the consumer base of MFIs by increasing the income limits of an eligible borrower to INR100,000 from INR60,000 in rural areas and INR1,60,000 in urban areas from INR1,00,000. It also proposes to double the cap on total borrower indebtedness to INR1,00,000 from INR50,000.

This measure could significantly increase the long-term potential of the sector in terms of size, scope and importance; existing borrowers with strong servicing ability and income just beyond earlier limits are now eligible for higher loans. Our analysis shows that rural incomes have increased by 70%-100% for various agricultural and non-agricultural activities and hence the servicing ability of customers has kept pace with the proposed change in lending limits. Higher loans could result in a 1%-2% decline in MFIs’ operating cost to total assets that currently are in the range of 6%-13%.

Ind-Ra had pointed out in its report Microfinance: Strong Comeback that MFIs were setting up incremental branches largely in non-south Indian states since some districts in south India and West Bengal were saturated in terms of borrower indebtedness or borrowings from two MFIs. Branch expansion in non-south states could suffer if MFIs decide to grow their loan book in south India with the proposed increase in borrowers’ income limits and total borrower indebtedness; this could also provide opportunities to new players in the non-south states. Also, MFIs will not be under pressure to dilute their underwriting standards to grow their loan books at pre-crisis rates if they ensure a correlation between income, needs and loans. Operationally, MFIs may require to set up separate joint liability groups for borrowers with higher eligibility.

The proposed guidelines increase the role of MFIs in financial inclusion and follow global evolution of MFIs. MFIs have evolved into entities in countries where have been present for over 20 years, providing a suite of financial services to unbanked borrowers, MSME and rural businesses. If domestic MFIs manage the credit and other risks maturely, RBI may permit them to operate in these segments.

(Source: Senior Manager - Corporate Communications and Investor Relations, India Ratings & Research A Fitch Group Company.)