Microfinance companies needs stable regulation to survive: Fitch

MUMBAI: Stable regulation is the need of the hour for microfinance companies in order to survive in financial markets, says sFitch Rating in its report on India's MFIs.

Fitch recognises that the challenges faced by MFIs in India are similar to the global trend. However, the report stresses on the need for a single regulatory authority instead of multiple regulatory bodies monitoring the industry.

"The experience of co-operative banks in India suggests that multiple regulators may not be as effective as a single strong regulator and may also make it difficult for MFIs to comply with different sets of guidelines," said Ananda Bhoumik, senior director (financial institutions) at Fitch.

The report comes in the wake of the state governments' move to bring MFIs under their ambit. There are reports that Bihar might soon pass its own ordinance on this. "Since MFIs cater to a large population, state governments' intention to regulate the industry is commendable," said Mr Bhoumik.

"But having a common and consistent set of regulations would add stability to MFIs' operations and enhance creditor comfort," he added. Last year, the Andhra Pradesh government passed an ordinance capping the interest rates charged by MFIs.

According to the report, this ordinance has resulted in mounting bad debts and there are chances of spillover in the neighbouring southern states. According to Fitch, the initial recommendations of the YH Malegam committee will not be a huge blow to large MFIs.

But the smaller companies might get affected due to the interest rate and margin caps on lending, leading to consolidation in the sector and forcing MFIs to rethink their business models. The funding for MFIs might be hard to come, both in debt and equity, as investors would rethink their investment in MFIs.

"From a creditor's perspective, the lower pace of growth is good news while lower margins would somewhat erode the defence against shocks to asset quality, the minimum core Tier-I ratio of 15% provides comfort," said Mark Young, MD (financial institutions) at Fitch.

Source: EconomicTimes