Microfinance investors reportedly are seeking to invest in India’s non-banking financial companies (NBFCs) after the Reserve Bank of India (RBI) established a new regulation framework in 2011 that included an interest rate cap of 26 percent on loans disbursed by microfinance institutions (MFIs). Unlike MFIs, NBFCs are regulated by RBI, and they may use a wider range funding types such as bank financing. They can offer products that are similar to those offered by banks such loans and the acquisition of shares, stocks and bonds; however, they cannot accept demand deposits, issue checks, participate in the bank payment and settlement system or facilitate deposit insurance operations.
According to Michael van den Berg of Triple Jump, a Netherlands-based microfinance investment manager, investors have gained an interest in NBFCs because they yield an internal rate of return of 15 to 20 percent, which is on par with that of MFIs. In addition, NBFCs tend to lend amounts between INR 5,000 (USD 92) and INR 40,000 (USD 733) with varying interest rates to micro-, small and medium sized enterprises, while MFIs tend to lend lower amounts only to individual customers. Credit Rating and Information Services of India Ltd. (CRISIL), an Indian ratings, research, risk and policy advisory company, reportedly expects NBFC retail lending to reach INR 4 trillion (USD 73.3 billion) by 2013.
It has also been reported that the increase in NBFC investments may prompt RBI to mandate that NBFCs hold loans for a minimum of 3 months before securitizing them.
By Jennifer Young, Research Associate
About Reserve Bank of India (RBI)
Established in 1935, the Reserve Bank of India (RBI) undertakes consolidated supervision of the financial sector comprising commercial banks, financial institutions and non-banking finance companies (NFBCs). The current focus of RBI is to supervise financial institutions, consolidate accounting standards, resolve legal issues in cases of banking fraud, monitor non-performing assets and supervise the rating model for the banking sector. In 1979, the National Bank for Agriculture and Rural Development (NABARD) was formed at the behest of RBI to provide regulatory oversight to regional rural banks (RRBs) and to promote the development of agricultural lenders: tasks that had been the responsibility of RBI. While non-banking financial companies such as for-profit microfinance institutions operate under RBI regulations, the responsibility for inspecting agricultural lenders, RRBs, state cooperative banks, district central cooperative banks and state cooperative agricultural and rural development banks was transferred to NABARD. RBI maintains these responsibilities for for-profit MFIs. Although RBI was originally the parent organization of NABARD and until October 2010 held a 72.5 percent stake in the outfit, RBI owns a one-percent stake in NABARD as of 2011.
RBI’s reserves stood at USD 302 billion at the end of 2011.
About Credit Rating and Information Services of India Ltd. (CRISIL)
Founded in 1987, CRISIL is a ratings, research, risk and policy advisory company that is based in Bangalore, India. It provides ratings for microfinance institutions (MFIs), including approximately 30 that report to the Microfinance Information Exchange (MIX), the US-based nonprofit microfinance information provider. Its offerings also include research on India’s economy, investment research outsourcing, fund services, risk management and infrastructure advisory services. CRISIL’s majority shareholder is Standard & Poor’s, the US-based credit rating agency.
Sources and Additional Resources
The Economic Times Story: “Micro-finance Investors Now Eye NBFCs”
MicroCapital Story: “MICROCAPITAL BRIEF: SKS Microfinance of India Announces $36m Securitization Under Amended Reserve Bank of India Guidelines,” December 2, 2012.
MicroCapital Story: “MICROCAPITAL BRIEF: ICRA Raises Rating for Arohan Financial Services Pass Through Certificates for $1.4m Securitization of Microfinance Loans,” February 3, 2012.
MicroCapital Story: “MICROCAPITAL BRIEF: Reserve Bank of India (RBI) Introduces New Category of Non-Banking Financial Company (NBFC): NBFC–Microfinance Institution,” November 2, 2011.
MicroCapital Universe Profile: Reserve Bank of India (RBI)
MicroCapital Universe Profile: CRISIL
MicroCapital Universe Profile: Triple Jump
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