Thursday, October 14, 2010

Regulating MFIs

MFIs are back in the news and once again for the wrong reasons - or probably the right ones. I am not talking about the sacking of Suresh Gurumani as SKS's CEO - days after the successful IPO.

The AP CM has again raised issues about the interest rates being charged by MFIs and has sought regulation of MFIs. Reports talk of some MFIs charging effective interest rates as high as 45% and about the farmer suicides ( The average lending rate is around 27-30%). A few years back - roughly 5 years back ( during Dr YSR's time) too, the AP Gov raised this as an issue. If my memory serves me right, I remember Dr Nachiket Mor, who was then heading the agri biz (among other things) at ICICI bank flew down to meet the AP CM to sort out the issues. ICICI bank then had a large exposure to MFIs - mostly in AP . Issues have time and again been raised about the way MFIs do their business ...the only thing that remains to be done is regulation.

Most of the MFIs have ROA well above 2 % (SKS reported 3.07% ROA and Spandana - for instance reported an ROA of around 4.68%) in contrast to the ROA of around 1 to 1.5 of scheduled commercial banks ). There is a resistance among MFIs to bring down the rates. For instance SKS justified the ROA as being 'justified and appropriate' as the business was unsecured. While on the face of it , it appears a correct reasoning, the fact is that - the social / peer security structure that works when lending is done is as effective - if not more than secured lending. Most MFIs report neglible portfolios in stress ( basically overdue portfolio). The on-time repayment rates are upwards of 98% and ultimate repayment is much higher. Infact most MFIs trumpet this achivement of on time repayment when they seek funding assistance from banks , who would naturally be wary of lending money for on-lending small and unsecured amounts. It requires ingenuity to use the same point to argue both ways !

40% interest and 3% ROA are only a shade better than what money lenders make. And that ' shade better' is because these MFIs are sophisticated, organized , - some owned by management grads from premier institutions and have letter pads ....

SKS has the following mission statement
'Our purpose is to eradicate poverty. We do that by providing financial services to the poor and by using our channel to provide goods and services that the poor need'

The only point that I used to keep pondering over was ' whose poverty are these MFI's seeking to eradicate' ?. With the phenomenal success of SKS's IPO, I think I have the answer.