Govt to review fund-raising plans of MFIs

NEW DELHI: The government does not appear to be too keen on unbridled growth of microfinance institutions (MFIs) and wants a review of the fund-raising plans that some of the players in the sector have.

Though a final decision on regulation will only be taken after a Reserve Bank of India-appointed committee looks into the entire gamut of issues related to the operation of micro-finance institutions, officials said the government has reservations about lending that was being done by some of the players.

"The idea was to support lending to those who did not have access to banking facilities and that too for productive use, not for meeting consumption spending. You can't be lending to high net worth individuals," an official said.

In recent months, the functioning of MFIs, especially the interest rate charged and the recovery methods adopted by them, have come under regulatory and government scanner. The Andhra Pradesh government has gone ahead and promulgated an ordinance to regulate these entities, while the Centre has postponed its plans to introduce a bill on regulating MFIs on account of the review that has been initiated by RBI.

As a result of the controversy, several MFIs who had lined up plans to raise funds through initial public offers have had to defer the issues, at least for the time being.

Sources in the government said there was a need to study how much fund-raising these entities should be allowed to do. "They can't be growing at rates which are faster than finance companies and opening offices in every district," said a source.

So far, SKS Microfinance is the only MFI to have listed but several others such as Spandana Spoorty Financial and Bandhan, among others, are looking to raise funds to boost their expansion efforts and also comply with the capital requirements prescribed by RBI. Ahead of their IPOs, some of the institutions had tapped private equity investors -- who seek high levels of profitability -- to raise funds.

Officials said that based on the RBI-appointed committee's recommendations, the government and RBI, the regulator for financial services firms and banks, will decide on the roadmap for regulation. At present, RBI regulates MFIs that have registered as banks, while the others are dealt with by Nabard. "Whatever be the decision, both sets of MFIs should have common regulation," an official said.