MICROCAPITAL STORY: Rising Interest Rates and New Reserve Bank of India Capital Adequacy Requirements Put Pressure on Indian MFIs

Recent increases in the cost of borrowing for many organizations around the world and new capital adequacy requirements are putting pressure on Indian Microfinance Institutions. According to The Times of India, both Equitas Micro Finance India (Equitas) and Madura Micro Finance ltd (Madura) are raising interest rates due to increases in the cost of borrowing. Also, SKS Microfinance (SKS) has begun looking for new sources of private equity funding, citing both the reserve requirements and increased interest rates.

Equitas is raising their interest rates to customers by 1 percent to offset increases in their own borrowing costs. Meanwhile, Madura is raising interest rates on new loans from 9.5 percent to 17 percent up to 18 percent to 21 percent. SKS also stated that they may be forced to increase lending rates if their own borrowing costs continue to rise. Aside from increases in borrowing costs, MFIs also face increased overhead costs, possibly due to inflationary pressures in the global economy.

A recent moneycontrol.com article, also explains how, aside from increased interest rates, reserve requirements increases and a reduction in exposure to microfinance by global investment funds makes SKS “not as profitable as [they] anticipated.” Reserve requirements are the percentage of deposits that financial institutions must hold in cash, preventing them from investing the capital. The Reserve Bank of India (RBI) recently raised reserve requirements for non-bank financial institutions to 15 percent. To learn more about the recent increases, please read this previous MicroCapital story.

To battle the increased costs SKS is planning to raise INR 300 crore (USD 68.2m) in private equity in order to meet expansion plans. Although they face some issues, MR Rao, COO of SKS, said, “economics of scale are helping us to absorb the cost,” pointing to the benefit expanding current services. No further information on the source of future funds was available.

SKS Microfinance, founded by Vikram Akula in 1997, is a for-profit Indian MFI. As of March 31, 2008, SKS had total assets of almost USD 337m, a debt to equity ratio of 536 percent, and a return on equity of almost 12 percent. It also had a gross loan portfolio of 261m, which included 1.6m active borrowers. All financial data was taken from MIX Market, the Microfinance Information eXchange.

Equitas, founded in 2007, is another commercial MFI in India. As of March 31, 2008, it had total assets of USD 4.8m and a debt to equity ratio of 66 percent. A return on equity was not listed. The MFI also has a gross loan portfolio of 4.1m, which includes 16,166 active borrowers. All financial data was taken from MIX Market, the Microfinance Information eXchange.

Madura is a Non-bank Financial Isntitution in India that works closely with other large commercial banks. In the 2006-2007 fiscal year, the MFI had a gross loan portfolio of USD 35m and 182 operational branches. Madura does not report financial data to MIX Market, the Microfinance Information eXchange.

By Greg Casey, Research Assistant

Additional Resources:

The Times of India: Micro finance institutions increase lending rates

MoneyControl.com: Rising int rates, change in RBI norms hit MFIs

MicroCapital Story, August 11, 2008: Change in Indian Capital Adequacy Standards Affect Microfinance Institutions

MicroCapital Story, August 21, 2008: MICROFINANCE PAPER WRAP-UP: An Investigation of Economies of Scale in Microfinance Institutions, by Joshua Zacharias

MIX Market: Profile for SKS Microfinance Private ltd

MIX Market: Profile for Equitas Micro Finance India

Madura Micro Finance ltd: Home

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