Management practices at many MFIs cause concern

In February 2009, the Anjuman Committee — a group that opposed MFI operations in Kolar district of Karnataka — told existing borrowers to neither borrow from nor repay MFIs. By the end July 2009, Rs 600 crore was reportedly in default. A similar situation is brewing in Mysore.

Nonetheless , there is a growing acceptance that private equity has to step in to shore up capital that’s necessary for growth. And these investors will not come in unless growth and returns are delivered.

But what’s perhaps worrying the regulator and some of the stakeholders is that the MFIs are still being run like small family-owned firms. Microfinance industry executives told ET on condition of anonymity about dubious practices like board minutes being fudged, senior management trying to enrich themselves, local level staff advancing fresh loans to hide bad debt and staffers running small rackets on the side.

Under the circumstances, the central bank’s warning is a powerful one. The cost of funds for the industry could rise by as much as 200-250 basis points, said Padmaja Reddy, managing director of Spandana Sphoorty Financial. And this would change the equations in the rural credit landscape .

At one level, the MFIs will become proportionately — in relation to a hike in rates — unattractive sources of credit in a marketplace where loans are also available through the SHG-Bank linkage, traditional sources of credit, richer farmers , government schemes and the like. It’s also pertinent to mention that, last week, the RBI allowed banks to charge ‘commercially viable rates’ — higher than the PLR — for priority sector loans below Rs 2 lakh to improve their lending to rural borrowers. In all, says Vijay Mahajan, founder, Basix India, MFIs would face a credit squeeze.

Such a move would also change equations within the microfinance segment. Among the MFIs, this might tilt the playing field in favour of larger players which operate on scale, focus mainly on credit delivery, and consequently have lower operating costs. Indeed, as Ms Reddy says, Spandana, which has an operating cost of around 5-6 % will not need to hike its interest rates for borrowers.