Majority of Indian MFIs May Have to Shut Shop

Monday, December 19, 2011

Mumbai: At least 80% of microfinance institutions (MFIs) may have to shut down in the next two-three years because of tough new regulatory requirements laid down by the Reserve Bank of India (RBI) and a shortage of funds, industry executives warn.

For MFIs categorized as non-banking financial companies (NBFCs), which are run as for-profit organizations, the threat comes from RBI regulations pertaining to minimum funds, loan provisions and capital adequacy. The reluctance of commercial banks to give loans to MFIs, and interest rate and margin caps will decide the fate of smaller firms.

India has around 60 microlenders incorporated as NBFCs and nearly 300 run as not-for-profit bodies such as non-governmental organizations (NGOs), trusts and cooperative societies.

Out of this, nearly 50 NBFC-MFIs and around 200 not-for-profit microlenders may have to wind up their operations or consolidate into large entities beginning next year because they will not be able to comply with the norms stipulated by RBI, senior industry officials said.

“In my view, only around 10 of the NBFC-MFIs can survive post-April unless a special dispensation is given by RBI,” says Mathew Titus, executive director of Sa-dhan, an association of microlenders.

In fact, the closures have already begun in Andhra Pradesh, which is the largest market for microfinance in India, accounting for more than a quarter of the Rs. 20,000 crore industry. An ordinance passed by the state government in October 2010, which later became a law, tightening regulation of microlenders threw the entire industry into a crisis.

Around 15 microlenders have already shut operations in the state, said Kishore Kumar Puli, managing director and chief executive of Hyderabad-based Trident Microfin Pvt. Ltd and the head of the Andhra Pradesh chapter of Microfinance Institutions Network (Mfin), an industry association.

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