India: Meeting New Bank Licensing Norms Tough for Most MFIs

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Aug 2011
Mumbai, India, August, 31 2011 - Barring a few top players, banking is likely to be a distant dream for most microfinance institutions in the country. This is because the draft norms on foreign shareholding, minimum capital requirement and diversified ownership structure would prevent micro-lenders from entering the banking space.

Spandana Sphoorty Financial, a Hyderabad-based microfinance institution promoted by Padmaja Reddy, had earlier expressed interest in setting up a micro-bank. While Reddy said the company was still reviewing the guidelines, she added meeting the minimum capital requirements would be difficult for cash-strapped Spandana Sphoorty.

“We are reviewing the guidelines. No decision has been taken yet. We are not ruling it out. But raising Rs 500-crore capital in the current environment looks challenging because our own capital base has been depleted by the crisis in the microfinance sector,” Reddy told Business Standard.

RBI has mandated the minimum capital requirement for new banks at Rs 500 crore.

Spandana Sphoorty's local rival, Trident Microfin, has already shelved its plans to open a bank. “Raising capital for the bank will not be possible because of the 49 per cent cap on foreign shareholding. Given what has happened in the microfinance sector in India, fund raising would be extremely difficult locally,” said Trident's chief executive, Kishore Kumar Puli.

Industry analysts said micro-lenders like Kolkata-based Bandhan and Chennai-based Madura Micro Finance were unlikely to secure licences despite relatively better financial positions, as they don't have a track record of over 10 years.

However, for large players like SKS Microfinance and Bhartiya Samruddhi Finance, the draft guidelines have opened doors of opportunity in the banking space. SKS, the only listed microfinance institution in India, already conforms to most of the norms proposed in the draft guidelines.

“The thrust of the draft guidelines of new bank licensing is on financial inclusion, which we welcome. We are reviewing the guidelines. The strategic decision on whether to apply for a banking licence would be taken by the board. We are not ruling it out,” said Chief Financial Officer S Dilli Raj.

SKS’ net worth is estimated at Rs 1,563 crore. The firm has 95 per cent of its branches in rural and under-banked areas, against RBI's proposal of having 25 per cent of the new bank branches in these regions. About 50 per cent of the company's board comprises independent directors, and this is in accordance with the proposed guidelines.

Bhartiya Samruddhi Finance, promoted by social entrepreneur Vijay Mahajan, has also firmed up plans to apply for a new banking licence.

Analysts said while microfinance institutions claim they have relevant experience in financial inclusion programmes, the recent crisis in the sector would make RBI cautious in offering banking licences to microfinance firms. “RBI will be very selective in offering new licences. Microfinance institutions may not be at the top of RBI’s list,” said an analyst with a domestic brokerage, on the condition of anonymity.



 

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