Increased bank interest rates and new capital adequacy norms of the Reserve Bank of India will soon weigh heavily on the poorest of the poor as microfinance institutions are also contemplating raising interest rates.
According to the new RBI norms, MFIs will have capital adequacy of 12 per cent immediately and 15 per cent by April 2010 if they are to continue legally.
This means that most MFIs have to raise enough funds to achieve such a balance to maintain higher capital-to-risk-assets ratio.
MFIs say they would be forced to increase interest rates if they are to be sustainable.
Says Suresh Krishna, MD of Grameen Kuta based in Karnataka: "As there is a 20 per cent rise in overall costs, thanks to CRAR increase, we are heading towards an increase in our interest rates too.
It is also leading to commercialisation of microfinance, which again makes it an expensive exercise and leads to higher rates."
The MFIs are forced to approach private investors to raise funds for capital adequacy. Krishna says the RBI norms would push MFIs to adapt themselves in a commercial mould and hence charge commercial rates, which is unfair to the poor.
But for most MFIs, the immediate solution is to offload portions of their portfolio to willing banks and thus reduce their burden of raising funds.
"When we need 15 per cent more funds than we have, the option is to double investments as well as do off-balance sheet transaction or selling parts of our portfolio to banks," says Krishna.
Grameen Kuta has been in talks with ABN Amro, Axis Bank, Citibank and Standard Chartered Bank to sell its portfolio.
P N Vasudevan of Equitas, an MFI based in Chennai, says that since it started as a non-banking finance company, it was targeting a capital adequacy of 12 to 15 per cent though it was expected to have only 10 per cent.
Equitas, which has a portfolio of Rs 70 crore (Rs 700 million), caters to about 60,000 urban poor borrowers.
However, Vasudevan questions the need to increase capital adequacy for MFIs.
"Normally for companies which are into risky lending, it is always good to have higher capital adequacy. However, MFIs are not into such risky business and their loans are generally very small. Hence for MFIs increasing from the current 10 to 12 per cent might have been adequate than 15 per cent," he says.
Meanwhile, SKS, another microfinance institutions with 1.7 million borrowers, says it will not increase interest rates in the next six months. While it charges 12.5 per cent in Orissa, Andhra Pradesh and Karnataka, it already charges 15 per cent in rest of the country.
Sitaram Rao, an expert on microfinance and consultant for SKS, says the margin for most MFIs is as little as 1.5 to 2 per cent. "They can take the blow for another six-seven months, hoping that things will improve after that," says Rao.
Chandrasekhar Ghosh, MD of Bandhan, another MFI, said every MFI is waiting for the other to increase rates.
Bandhan had reduced interest rates from 15 to 12.5 per cent two years ago and feels it can go back to the original now, if pushed to the corner.