After a year that saw a mix of both positive and negative developments for the micro-lending sector, hopes are up for some deepening of reforms and some correctives. A key positive measure last year, the creation of new credit lending entities like the small finance banks and payments banks, were a boost to the financial inclusion space and needs to be seen on how they take off in 2018. Mainstream banks also expanded their footprint in this space with some acquisitions.
However, there was also a setback: most micro-lending institutions hit record highs in non-performing assets (upto around 15 per cent as opposed to just about 1 per cent earlier) following demonetization and remonetisation of high currency notes and are still coping with it. Given this background, the budget this year, microfinance sector players hope, will see some re-thinking from a taxation perspective that would make government an enabler for growth.
There are broadly two issues with this:
Firstly, GST. "Different services are offered to the microfinance clients and we are hoping that the service tax , now GST, will be done away with since it is a service to a low income segment of the population," says Ratna Viswanathan, CEO MFIN (Microfinance Institutions Network) . The counter argument could be that the MFIs are for-profit and therefore need to pay the tax but their view is that they need to be structured as for-profit because grants alone would not make it sustainable. Since we borrow at commercial rates from the banks - 13 to 18 per cent, provide cash collaterals to the banks, and lend at 24 per cent, while banks access funds at 6.5 to 7 per cent interest and directly lend in the MFI space at about 26 per cent. The microfinance institutions for the past two years have been using the UIDAI's Aadhaar biometric authentication for KYC (Know Your Customer) when enrolling new clients. But now, when they are moving to e-KYC, they are finding it quite expensive. "For e-KYC, UIDAI is levying a rather hefty charge. Perhaps if they could consider waiving it since, again, the services are for the low income households," says Vishwanathan.
Moving to e-KYC is important to ensure there is no duplication as the MFIs need to ensure the borrowers are saved from over-indebtedness. Through e-KYC, the borrower need not submit the documents but can authorize the banks or lending agency to access the borrowers Aadhaar information directly from the UIDAI and for this the UIDAI charges.
Secondly, lending to small businesses. The credit guarantee fund scheme has been extended to not only banks but also for NBFCs (Non Banking Finance Companies). This is a credit guarantee scheme that Sidbi administers on behalf of the central government for lending to small businesses. The biggest problem with banks is that they need collateral, which is not something, many of these businesses cannot provide therefore the scheme, now made available to NBFC and not just banks so that small businesses could get this loan based on the guarantee. "While the direction taken by the government is positive from a policy perspective, I do hope the budget will further expand the coverage for the guarantee fund as currently it is still restricted in terms of size of an NBFC and on the amount of loan," says S Viswanatha Prasad, managing director, Caspian Advisors, an early investor in three small finance banks.
The other concern that many have and is worrisome since there are only 12 months to the elections, is how to ring fence micro-loans from political interference? During the demonetization period, this was exploited by some local political groups. More protection is needed for institutions lending unsecured small amounts to borrowers. Ideally, increase client protection laws but also ensure enforceability of the debts while protecting the borrowers.
Finally, currently the small finance banks cannot lend loans below Rs 10 lakh in lieu of security. "So a small trader cannot graduate from a self help group to a small finance bank," says Prasad and this hopefully, the budget would also try and address.