RBI breather for MFIs

Easing of norms to help AP-based MFIs avoid bankruptcy

Published: 07th August 2012 10:08 AM  |   Last Updated: 07th August 2012 10:08 AM   |  A+A-

Micro Finance Institutions (MFIs) can now heave a sigh of relief with the Reserve Bank of India (RBI) easing norms last week. According to the industry, some of the Andhra-based MFIs, can now avoid bankruptcy, with the apex bank extending relaxations of provisioning, specifically, for the AP loan portfolio.

“Large MFIs could have survived with the original norms. But for mid and smaller players, given the tight capital adequacy ratio, provisioning for the AP loans was too taxing. Had there been no relaxation now, by October, some of these players would have gone bankrupt,” a senior official of a leading MFI told Express. He added that there was a threat for some players losing their NBFC licences given the 15% capital adequacy was not met.

As per the current norms, the provisioning made for the AP portfolio would now be notionally computed as part of the company’s networth. And this would be progressively reduced equally over a period of five years. “The relaxation will now allow companies to compute the total networth. This is good for the industry and will help us revive operations,” said S Dilli Raj, CFO, SKS Microfinance Ltd, which so far has written off more than `1,100 crore.

Shares of SKS Microfinance Ltd, India’s lone listed micro lender, rose as much as 16% in intra-day trading on Monday on BSE following RBI’s decision to relax norms.

According to Dr Vidya Sravanthi, Promoter, Asmitha MFI, companies were handicapped as they had to provide for the AP loans, which eroded their networth and dried up equity. “It would have been extremely difficult to sustain operations if RBI had not relaxed the current norms,” she said. There are more than 40 registered NBFC-MFIs across the country and AP used to contribute more than a quarter of the overall MFI business.

Besides provisioning, RBI also reduced the margin cap from 12% to 10% and allowed a buffer range of 4% for interest rates. It means, MFIs can now charge upto 30%, as long as smaller MFIs can retain a margin of 12% and larger MFIs a margin of 10%.

“Overall, it’s a positive sign for the sector, which has been reeling under crisis. With RBI taking necessary measures, there’s a room for growth,” said Alok Prasad, President, MFI Network.

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