India: Smaller MFIs Finding It Difficult to Access Credit

Jul 2016
India, July, 11 2016 - Smaller micro-finance players are finding it difficult to access credit on both the debt and equity side.

Nearly 22 of the 57 micro-finance institutions (MFIs) in the country belong to the Rs 100-Rs 250 crore asset size bracket, but they are unable to access even a fraction of the capital larger players like Equitas, Ujjivan, Janalakshmi are able to access.

MUDRA Bank, public-sector lenders prefer lending to established players, forcing smaller MFIs to get loans at prohibitively expensive rates from large non-banking finance companies (NBFCs) like Muthoot, Reliance, Religare, IFMR Capital. "This cost unfortunately gets passed onto the end consumer -- contrary to the notion of affordability or financial inclusion. Instead of directly being able to access credit from PSUs, consumers are now having to knock at the doors of MFIs, who in turn get credit from larger NBFCs, who in turn get credit from PSUs -- This makes things more expensive for the industry and consumers," Anand Rao, a director, MicroFinance Institutions Network (MFIN).

MFIs have to maintain a capital adequacy ratio of 12% and a prudent debt-equity ratio of 7:1. But smaller MFIs find it difficult to raise equity on both the domestic and international front. "A lot of MFIs start out with just Rs 5 crore of capital. Foreign investors have to invest $1 million (Rs 6.74 crore) for a 51% stake. The domestic investor also has to raise that much capital. Now if he wants to increase his stake he has to invest $5 million. The rules are too stringent and make it difficult to raise equity," says MFIN's Rao.

Whether it is the Government of India's India Inclusion Fund, SIDBI or MUDRA Bank, players say that only the top five or 10 MFIs manage to get loans from these entities. "Even when we do get loans - its few and far between and caught up in too much red tape. When we approach banks they have this mentality that it is better giving Rs 100 or Rs 200 crore loan to a big player than 20 - small Rs 5 crore loans to other players," says Joby C O, CEO, Varam Capital Private Limited. "We must remember that MUDRA Bank is working with SIDBI to elevate poverty and help small enterprises. Their mandate is to help enterprises, micro-SMEs, and not the MFIs," adds MFIN's Rao
Stepping into this dire need for liquidity are larger NBFC players like Muthoot Finance, Reliance Capital, Mass Financial, Capital First, Religare Finvest, IFMR Capital, etc. "We are a pure debt-player and we give loans to entities who have just Rs 5 crore on their loan book to Rs 30,000 crore. And we must also remember that the big players today in the MFI space started out small. We've had companies with less than Rs 16 crore credit start out and now have a book size above Rs 3,000 crore," says Kshama Fernandes, MD &CEO of IFMR Capital.


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