In a development that could potentially offer more relief to microfinance borrowers, India's microfinance players feel that lending rates can be brought down further if microfinance institutions (MFIs) get funding at lower cost. "Interest rates are an issue that concerns the entire industry, which is subject to combination of issues like scale, cost of availability of funds and market forces," said Vijay Mahajan, president, Microfinance Institutions Network, that represents 44 microfinance lenders and also heads the MFI Basix. The issue of lower interest rates has caught up since the Andhra Pradesh government came out with an Ordinance to control the micro finance companies. In September, the finance ministry had asked state-owned banks to ask MFIs to cap their lending rates in the range of 20-24% as a precondition to access bank finance.
SKS Microfinance on Tuesday announced that it will bring down the lending rate to 24% across states. "Yes, it is possible to reduce it (interest rates). One way to reduce it is by reducing the operating costs, and second way is banks reducing their interest (rates charged) from MFIs," said, Sajeev Viswanathan, CEO of Bharatiya Samruddhi Finance, a microfinance firm promoted by Basix. Microfinance players raise funds through various sources such as equity, term loans from banks/financial institutions, securitisation, non-convertible, debentures and commercial paper. Out of the R33,000 crore loan book size, about R5,000-R6,000 crore comes from private equity, capital market while around R27,000 crore comes from banks, which is the only sustainable source of funding said Viswanathan. MFIs also feel that growth in consumer base will also be critical in bringing down the cost. "As MFIs, we have always stated that the growth of the base (of customers) will be critical to the reduction of costs. In addition, we can reduce costs if cheaper source of funds are made available to us," said Mahajan.