MFIs redesigning business models: Crisil

07 Dec 2011

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A year after the government of Andhra Pradesh promulgated its ordinance on microfinance institutions (MFIs), leading to a major upheaval in the MFI sector, India's MFIs are redesigning their business models.

Amidst moderation in growth, decline in profitability and subdued funding prospects in their core business, several MFIs are starting new ventures that are focused on secured
asset classes or leveraging their branch networks to offer other retail products, says Crisil.

This is needed to increase stakeholder confidence for the long-term sustainability of the sector, according to Crisil.

The Reserve Bank of India's (RBI's) recent guidelines are also aimed at structurally strengthening the MFI sector over the long run. RBI's revised provisioning norms and classification of non-performing assets (to 90 days
overdue from 180 days overdue) are unlikely to impact the profitability of the non-Andhra operations of Crisil-rated MFIs over the medium term, it said.

The MFI sector's growth and profitability prospects have moderated since implementation of the Andhra ordinance, because of the subdued funding environment and operating challenges associated with regulatory restrictions on multiple lending, loan size, and end-use of loans. While there has been some regulatory clarity and selective lending by banks in the last few months, funding to the sector has not picked up. Crisil-rated MFIs have raised Rs500 crore from banks and alternate sources in 2011-12 - much lower than the pre-ordinance levels.

MFIs are, therefore, diversifying their business models by starting new ventures aimed at entering other asset classes (mostly secured, such as loans against gold jewellery, housing and vehicle financing loans). Some MFIs have moderated their growth plans, while others have opted to leverage their branch network to offer retail products.

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