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A case for self-regulation

delhi Updated: Oct 28, 2010 01:28 IST
Abhijit Patnaik
Abhijit Patnaik
Hindustan Times
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For ages, becoming a doctor or a lawyer was the sure shot way to being called successful (and becoming the apple of the potential mother-in-law’s eye). Then came investment banking. Well, it’s time to add another career to that list — microfinance entrepreneurship.

Recent moves by some of the big MFIs in India to raise funds have brought in boatloads of cash into their coffers (and into the pockets of the promoters and founders.). SKS Microfinance, India’s largest MFI, raised Rs 1,600 crore by an initial public offering (IPO) in July 2010. Investors in SKS have become overnight multi-millionaires. The stake of one of them, Sun Microsystems founder and noted Indian venture capitalist Vinod Khosla, is worth $120 million (about Rs 540 crore), according to a recent article in the New York Times.

MFIs that run for profit insist that given the huge shortage of funds available for the poor, raising money by going public is a positive step because it can give more people access to much-needed capital.

“The demand for capital is in the range of Rs 2,00,000 crore in India. Currently we are meeting only about 15% of that,” says Vipin Sharma, CEO of Access Development Services (ADS), a Delhi-based non-profit company dealing with microfinance. But this has left a bad taste in the mouth of some in the development sector. After all, microfinance is not about making money, but about helping the poor. Has there been a mission drift?

“It’s ok (to raise money through an IPO) but there are the demands of those who put in this equity. If they are social investors, then they are more patient. But private-equity investors demand high returns. There is tension between the soul of microfinance and scale — how big you can grow” Sharma adds.

Rise of the mega MFI

State-sponsored financial institutions to help the poor have achieved mixed success in India. “Despite all the efforts, even after the nationalisation of banks and government’s thrust on financial inclusion, large numbers of rural people remain under-banked. This is due to both product design as well as delivery capability,” says Padmaja Reddy, founder and managing director, Spandana Sphoorthy, one of India’s largest MFIs.

MFIs have succeeded in setting up a system to deliver doorstep credit services in a viable manner. And as they flourished, demand for capital has risen. “There has been a natural progression to IPOs, given the large demand-supply gap. There is no investment tool that has a pool of so large an investment than a public offer,” says Dilli Raj, chief financial officer of SKS Microfinance.

Concerns on interest rates

Generating good returns on investment is hardly punishable, but the huge profits in this sector are raising the eyebrows (SKS Microfinance recorded a more than three-fold jump in year-on-year profit to Rs 67 crore for the April-June 2010 quarter). The government and the RBI are getting uncomfortable with the interest rates being charged (22-36% on average). “There is general discomfort when the industry goes from doing business in a sustainable manner to obscene profit making,” says Sharma.

Knee-jerk reactions?

News of suicides in Andhra Pradesh, allegedly due to coercive methods used by some MFIs, have led the government there to pass an ordinance to regulate them. N. Chandrababu Naidu, leader of the Telugu Desam Party, has called for a cap in interest rates. On Wednesday, SKS announced “voluntary” rate cuts.

Knee-jerk reactions like capping interest rates may well reduce the profitability of the large MFIs, but it will be a nail in the coffin for smaller operators. “(Capping interest rates) would mean that many small and start-up MFIs will become unviable,” says Reddy.

Finance minister Pranab Mukherjee has put off setting up a regulator for the sector. But, introspection and innovation are required. MFIs need to bring in better governance practices into their operations. Delinquent firms punished. Operating-cost benefits need to be passed on to the borrowers in a better way.

It is also important to set up a framework that ensures that this credit-delivery sector grows in a more balanced way. “All the MFIs together are likely to disburse more to the rural low-income sector than the National Rural Employment Guarantee Scheme, the government’s flagship programme” says Reddy.

The Rs 30,000cr business