The juggernaut of rising interest rates is now about to sweep the microfinance sector.
ICICI Bank’s microfinance associate, KAS Foundation, has already hiked its lending rate, and other major institutions say they too may have to follow suit.
KAS Foundation, which has disbursed loans to the tune of Rs 222.54 crore as on March 31, 2007, increased the rate of interest to 21-24% from the earlier 18-21% range, depending on the loan tenure.
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“We tried to pull the wagon until now, but after the Reserve Bank of India (RBI) revised rates we can no longer take on the burden,” says S Kathiresan, founder and chief executive officer of KAS Foundation, which has operations in Orissa, West Bengal, Chhattisgarh, Madhya Pradesh, Maharashtra, Tamil Nadu, Andhra Pradesh and Kerala,.
“The cost of funds for us is 13-14%, while an additional 6% is spent on transportation - both to disburse money and for recovery - and salaries for the persons disbursing and collecting funds,” he added.
Another major microfinance institution (MFI), SKS Microfinance, run by Vikram Akula, also feels it may be forced to increase rates in case the RBI hikes rates any further. “We have absorbed the increases (so far) and have decided not to pass on the burden to our customers. But, if the RBI increases rates again, we would have to hike rates as well,” says MR Rao, chief operating officer of SKS Microfinance.
Currently, SKS charges an overall weighted average lending rate of 26% in all regions except Andhra Pradesh, where the rates are lower because of the concentrated network of the institution.
Another leading Indian microfinance institution, Spandana, is also expected to announce a hike in interest rates within the next two weeks, sources say. Efforts to get in touch with MFIs Share Microfinance and Basix, the child of Vijay Mahajan, did not bear fruit.
“Many MFIs have been complaining that the cost of funds has shot up and they may have to increase interest rates. This increment in rates would be in the range of 2-3% - on a par with the hikes executed by the RBI in recent months,” an executive at a research agency divulged, requesting anonymity.
But, interest rate is a very sensitive issue. In fact, rates have been trending down till recently due to the competition to lend. Echoing the views of the research agency, Moumita Sensarma, head of microfinance at ABN Amro Bank, said, “While there is a definite squeeze on the spreads generated by MFIs, nearly all of them have absorbed the increased cost of funds (except a small number who have raised their on-lending rates). This is primarily because for the ultimate borrower (mostly poor women in rural areas), interest rates are a sensitive subjec”.”
Explaining how MFIs have been able to sustain the rates until today, Sensarma said: “Most MFIs, particularly the larger ones, have relied on increasing the volumes much faster to cover for decreasing spreads rather than passing the same onto their customers.”
But this could be about to change.