New Delhi: Interests rates on micro loans, which stand at over 20 per cent in the country, are falling at an average of 150 basis points annually as new entrants try to outdo established players by slashing rates and loan size gets bigger, reducing the cost of loan for the banks.
"The average interest rate currently in the sector is at 21.5 per cent and it is declining by 1.5 percentage points every year," said Brij Mohan, Chairperson, Access Development Services, a not-for-profit company engaged in the sector.
Access Chief Executive Officer Vipin Sharma said, "There
is a strong declining trend in interest rates as the sector is
reaching out to larger number of people and the loan sizes are
increasing. Further, growing competition has also impacted."
Higher cuts in interest rates is possible if microfinance
institutions (MFIs) are allowed to accept deposits, Brij said.
"We are waiting for the Microfinance Bill to get through.
If the MFIs start taking deposits, it would immediately bring
down the cost of funds and thereby interest rates. Grameen
Bank in Bangladesh don't rely on banks for funds," he said.
Despite falling interest rates, there has been a growing
interest in the domestic microfinance sector, which has done
relatively much better than its counterparts in other parts of
the world and is the largest microfinance market in Asia.
The total outstanding loan of the MFIs in India grew by
97 per cent to Rs 11,700 crore in fiscal 2008-09, the year
marked by the global financial crisis. "The same year, there
was a contraction in the international scenario," Sharma said.
Global financial major Citi has been lending to MFIs in
India since 2005 and sees "immense potential" in the sector.
Through MFIs, Citi has presence in 17 states.
"Among multinationals and even private banks, we are one
of the leading players in the sector. We see it as an integral
system of our business strategy," said Citi Microfinance India
Country Director Alok Prasad. "The delinquency levels are low.
There are high quality assets performing well," he added.
Experts put Rs 1,35,000 crore as the potential demand of
the sector. While there is no cap on the micro credit, finance
up to Rs 50,000 is classified as microfinance. Non-performing
asset (NPA) is minimal at 1.5 to 2 per cent.
In the last two years ending March 2009, the sector has
received equity funding of USD 180 million in the microfinance
institutions (MFIs). "Of this, 90 per cent came from foreign
investors. Domestic investors are yet to pick up," Sharma
said.
However, most equity funding went to tier one MFIs, which
is around 2 per cent of the 3,500-odd MFIs in India but serves
77 per cent of the clients. Some also went to tier two MFIs
(15 per cent of all MFIs catering to 17 per cent clients).
While equity funding is slowly gearing up, the Indian
microfinance sector remains "highly leveraged". "Of the total,
equity would be a maximum of 10 to 11 per cent. Rest 89 per
cent is through debt," Sharma said.
Bureau Report
First Published: Tuesday, October 20, 2009, 22:54