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Delinquency rate dips for MFIs as RBI steps bear fruit

Delinquency rate dips for MFIs as RBI steps bear fruit

18 Oct 2013
Financial Express

Edition: Page 08

 

Microfinance institutions (MFIs) have seen a steady drop in delinquencies over the past one year as they turned more selective in their lending.

Microfinance institutions (MFIs) have seen a steady drop in delinquencies over the past one year as they turned more selective in their lending. The systemic delinquency rate dropped to 0.74% in August 2013 compared to 1.1% in April and 1.6% in mid-2012, according to a report by credit bureau Equifax Credit Information Services.

In absolute terms, the numbers of accounts that are more than 30 days outstanding dropped to 1,68,865 in August 2013 from 2,98,472 in mid-2012, with most of this drop coming from states other than Andhra Pradesh. MFIs disburse short-term unsecured loans, typically with a duration of one year, which are expected to be repaid in weekly or monthly instalments. The-se loans have no collateral, so the expected loss in case of delinquency is the entire amo-unt of unpaid principal. “The decline in delinquency rates is great news for Indian microfinance and banking industry, and is an affirmation that the use of the credit bureau in MFI lending and related tools are adding visibility and value to the MFI market,” said Equifax MD & CEO Sanjay Patel. Equifax's database captures about 35 million borrowers and is updated monthly by more than 125 MFIs.

Microfinance companies have been able to bring down delinquencies down after the Andhra Pradesh crisis in 2010 through strict norms for geographic concentrations, proc-ess improvements through usage of technology and trai-ning and adherence to the guidelines laid down by RBI), said another report by analy-sts at Antique Stock Broking.

Tougher guidelines from the RBI have also meant that MFIs need to be more selective in their lending. Bandhan Financial Services, one of India’s largest MFIs, said they have seen a 1-2% loan rejection rate. “Out of about 4 lakh people who apply for loans in a month, we reject about 80 people in a geographic area based on the data we get from credit bureaus,” said Chandra Shekhar Ghosh, CMD of Bandhan Financial Services. Bandhan’s outstanding loans are currently stand at R4,500 crore and its collection rate is 99.5%.

The improvement in asset quality and lending standards have also meant that banks are now more open to lending to MFIs. “MFIs are getting more funding from banks and the equity market, though they are being more cautious and selective,” said Alop Prasad, CEO, Micro Finance Institution Network, the industry body for MFIs.

Following the microfinance crisis in Andhra Pradesh, the RBI had set up a committee headed by YH Malegam to study the issues in microfinance and suggest a regulatory framework for the industry. Most recommendations of the committee were accepted by the RBI.

Under the new guidelines, MFIs cannot lend amounts more than R50,000 and more than 70% the companies’ loan book must be towards income generating activities.

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