Monday, April 16, 2012

Jairam Ramesh's value addition to the Microfinance sector

After phenomenally adding value as Minister for Environment by blocking various projects and then mysteriously approving them, in his new avatar Jairam Ramesh is looking to adding value as Rural Development Minister.

For too long, the Microfinance industry has been suffering because of unreasonable demands placed on them. The RBI regulation now states that they cannot charge more than 26% interest. Plus, their spread cannot be more than 10%. That is, if their cost of borrowing is 12%, they cannot even charge 26%. They can only charge 22%. But if their cost of funding is 18%, then they cannot charge 28% but only 26%. Thus the maximum spread is 10%.

Then, there are other restrictions. They need to have a minimum of 10 crore equity. There are quite a few Microfinance companies with equity considerably lower than this. They have to now scramble and get this equity. But given that the market situation is so bad, no one is likely to be interested in investing in them, or if they invest, it will be at the face value or perhaps even at a discount, thereby diluting the promoter's equity completely.

Nationalised banks have been unwilling to lend money to the Microfinance companies, as they demand a clean balance sheet and no loss. But given the whacking these companies received last year thanks to brain-dead AP government law and the SKS mess, most companies have made a loss.

So, these companies have nowhere to go, and they were seriously looking forward to the Microfinance bill from the Govt. of India. Now steps in Mr. Jairam Ramesh saying that this bill will affect Self-help groups (SHGs). In what way, I am unable to understand. Is the proposed law asking money to SHGs to be stopped? No. The proposed law merely supersedes silly laws by state governments.It creates a regulatory authority to deal with these institutions instead of allowing every single state government to thrust its own laws.

Jairam Ramesh has a problem with "Akulas". In fact, the entire Microfinance industry has a problem with Akula and his SKS which in their extreme desire to grow went overboard. But then the new set of regulations have tightened the sector enormously. Can the Minister mention another name or another company? How can he tarnish the entire industry using a single name?

The delay in passing this bill will make the life extremely difficult for many small Microfinance companies. The lack of clarity will force fewer private banks to lend money to Microfinance companies. The same thing will keep venture capital firms to stay away from investing in this sector.

The losers will be the promoters of Microfinance companies and millions of poor people. SHGs cannot be winners either. The winners will be moneylending sharks and Jairam Ramesh like politicians.

No comments:

Post a Comment