Unravelling the Malegam Conundrum Merge or Submerge

Recommends NBFC MFI new category > 90% total assets in Micro finance Likelihood of acceptance- Very High

Impact on sector

NBFCs having diverse portfolio inclusive of Microfinance have to redefine business. Lesser product innovation Mainstream NBFC may not have Micro finance as one of the activities Serious players to enter Microfinance as they need to have minimum 90% Micro finance to be classified as NBFC MFI

Borrower Income < 50,000 per annum Loan total - Rs 25,000/Borrower Tenure - 12 months (Loans upto 15,000) Tenure - 24 months ( Loans above 15,000) Loan without collateral Repayment weekly/fortnightly/monthly (As per borrower choice) 75% of total MF loan for income generation

Likelihood of acceptance- High with minor changes ( Income limit- 1 lakh and lending limit 50,000) Impact on sector Unless lending limit is increased there would be issues in lending in South and urban areas where ticket size and income is high MFI has to move newer areas and leave many urban pockets. This will increase reach across the country and diversify portfolio in long run. In short term MFIs have to curb growth in current areas to be Malegam Compliant Flexibility in borrower repayment is positive for the sector in stead of mandatory monthly collection as per AP ordinance

Recommendations Margin cap - 10%- MFIs above 100 Crore asset Margin cap - 12%-MFIs below 100 Crore asset Maximum borrower interest rate - 24% Processing Fee - 1% Maximum No admin charges in Insurance No security deposit Likelihood of acceptance - High

Sectoral Impact Difficult to calculate cost of funds especially smaller MFIs who do not have professionals on roll Consolidation of existing MFIs as many smaller ones will not survive New MFIs will req. min 5 yrs to break even PE investment will decline to sector This will reduce growth pressure on industry Very few NBFCs take security deposit and such impact will be limited to those few MFIs MFIs have to reduce expenses drastically Low margin would discourage new players in the sector

Recommendation Borrower member of one SHG/JLG Maximum 2 MFI per borrower Moratorium period Sanctioning in central location and > 1 person involved in sanctioning Credit info bureau of borrowers to be established and all MFIs are members

Sectoral Impact Practically not possible to ensure borrowers are in more than one group. However this will discourage MFIs to consciously break SHG of banks to have fast growth. Many parts of South borrowers have already taken > two MFI loans. MFI has to migrate new areas Credit bureau is a progressive measure and would help to curb multiple lending in medium term Sanctioning by > 1 person would ensure better control and may require more expenses by the smaller MFI. Most of the larger MFIs have current process of approval by more than one person

Recommendation- Min. Networth - 15 Crore Sectoral Impact Players having networth substantially below 15 crore will find it difficult to raise equity in current environment There will be consolidation of smaller players MFIs not affected AP crisis are likely to take over such MFIs MFIs not finding takers would not be able to bank finance and face closure This will serve as entry barrier and trend of senior bankers and professionals setting up MFIs will substantially reduce

Recommendation CAR- Increasing from 12% to 15%

Category No. of days past due date 0-30 Current Provisions % Proposed Provisioning

31-60
Standard Sub Standard (1) Sub Standard (2) Sub Standard (3) 61-90 91 120 121 150 151 180

0.25%
Highest of 1% of O/S or 50% of over dues > 90 days or 100% > 180 days overdue

20%

Loss Asset

>180

100%

Sectoral Impact MFIs across India have to provide higher provisions (1%) impacting profitability immediately but good on long run. AP based MFIs have to provide much higher in 90-180 days bracket and adverse impact on profitability/capital next quarter itself. Capital adequacy of 15% would be a challenge for MFIs and curb their growth plan in short term Higher CAR ( 12% to 15%) requirement would reduce leverage of MFIs and helpful in the long run MFIs having AP exposure may find it difficult to meet double whammy of higher provisioning & capital adequacy requirement

Recommendation Separate reporting of Assignment & Securitisation In case of recourse case, it would be considered for CAR calculation In case of non recourse, credit enhancement to be reduced from capital Bank to purchase portfolio which has adhered norms as per regulation and is accountable for it. MFIs providing > 15% of credit enhancement ( which is likely in current environment) has to provide more capital for securitisation and assignment.

Impact on Sector Bring transparency with disclosures of securitisation and assignment Stringent CAR norm for assignments would discourage overleveraging through assignment AP MFIs unable to raise capital and using Portfolio sale off as a tool to maintain CAR will have problem Banks have to improve upon due diligence on portfolio assignment as they are primarily responsible for it Banks may to incur additional cost to ensure due diligence on portfolio

Recommendations Primary Responsibility with MFI Industry Association to play proactive role Banks also have ensure compliance of norms RBI to enhance existing monitoring and conduct both onsite and offsite inspection of MFI and MFI association RBI to have power to remove CEO/Director of MFI

Sector Impact Very Positive with enhanced RBI monitoring the sector would be better controlled and immediate corrective action taken MFI Association and Bank also has to take a key role in monitoring & Compliance This would give credibility to the sector and MFIs non adhering would face severe consequences Provision of penalty and additional power to RBI will be create fear among MFIs for any violation of norms

Recommendation Credibility to the sector with closer RBI monitoring PSL Status continued Not part of Moneylending Act Would overrule AP ordinance Domestic social capital fund may be established Greater disclosure norms, better Governance requirement helpful in long run Challenges AP Govt. still may not accept it and challenge it in Court