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Rediff News  All News  » Business » Rangarajan seeks recast of MFI biz model

Rangarajan seeks recast of MFI biz model

December 09, 2010 14:37 IST

PM's economic advisory council chairman C Rangarajan has asked microfinance institutions (MFIs) to overhaul their "flawed" business model for sustainability.

This comes on the heels of former RBI Bank governor Y V Reddy likening MFIs to moneylenders, stating that most MFIs are either registered or unregistered NBFCs, he said they are following a flawed business model by lending to consumption-related spends.

"Unless they change their lending model, they will not be able to sustain their business for long", Rangarajan said.

MFIs should lend more for productive purposes and not just for consumption- related expenses, he said adding bulk of the current MFI lending is towards consumption.

The former RBI chief also said MFIs should stop extending multiple loans to the borrowers as this could lead to default.

Reddy last month had labelled MFIs as nothing better than traditional moneylenders and had called for stern regulation.

"Profit-seeking MFIs should be studied as they do not come under the laws relating to money lending or usury. After all, they are no better than money lenders," Reddy had said.

The nearly Rs 20,000-crore MFI industry is reeling under a severe crisis following the Andhra Pradesh Ordinance in October.

The ordinance sought to control interest rates charged by MFIs and also to check the coercive recovery tactics adopted by them.

This adversely impacted their collection and left them in a severe liquidity crisis. Since the Ordinance, banks have slowed down their exposure to the sector.

MFIs are in the business of lending to the poor who do not have access to bank funds and they source their funds from banks at an interest cost of 12-13 per cent but they in turn lend at much higher cost of nearly 30 per cent.

The Reserve Bank has also set up a panel to look into the entire gamut of MFI business. On the corporates' call for developing debt market, Rangarajan said, to fuel the faster growth of the economy, the banks will have to grow 25 per cent annually to meet the huge demand for funds from all areas of the economy.

On the back of strong Q1 and Q2 GDP growth, the Government early this week upped its growth forecast to 9 per cent or even above this fiscal from the previous 8.5 per cent as was projected in the Budget.

While GDP logged in a smart 8.8 per cent in Q1, the numbers for Q2 was even better at 8.9 per cent.

This robust Q2 numbers are despite the fact that IIP figures for August and September were abysmally low at 5.6 and 4.4 per cent respectively but a strong show by farm and services sectors made up for the poor show by manufacturing.

Since most of the investment to help drive the faster economic growth will be into infrastructure projects, which demand huge amount of long-term funds, he warned that the banks can face "a liquidity mismatch" in the times to come as increased exposure to realty and infrastructure will increase the maturity of bank assets.

"There is a possibility that the liquidity risk will increase because of growing maturity mismatch. Increased exposure to infrastructure and real estate will lengthen the maturity of bank assets," he pointed out.

As a step towards warding of such distortions, he said, a robust corporate debt market can help a long way. But the problem is that the country does not have the needed institutions to support such a market.

Therefore, he said, "before developing a full-fledged corporate debt market, we should have institutions that can support and sustain such a market. We should also try to bring in insurance and pension funds into this market."

Among the large banks, Axis Bank bagged the best bank award for the second time in a row, followed by Punjab National Bank and HDFC Bank, while Yes Bank has been adjudged as the best mid-size bank, followed by Kotak Mahindra Bank and Jammu & Kashmir Bank.

For the small banks category, DBS Bank has been picked up as the No 1 followed by Scotia Bank and BNP Paribas; while the top three amongst the very small category, has gone to Shinhan Bank, Mashreq Bank and Oman International Bank respectively.


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