Microfinance Focus, January 11, 2012: Micro-Credit Ratings International (M-CRIL) has recently released a paper ‘Liberalisation of foreign borrowings by Indian MFIs: How best to leverage this regulatory concession’. The paper discusses the implications of RBI’s recent amendment of the External Commercial Borrowings regulation.

As per the revised regulation, all microfinance institutions are allowed to borrow from eligible foreign sources up to a limit of $10 million in a financial year. Earlier, foreign borrowing by Indian MFIs registered as NBFCs was not allowed at all and borrowing by those registered as NGOs was only allowed up to $5 million per year.

According to M-CRIL’s analysis, an MFI can only earn a surplus if it maintains tight control of its operating expenses (OER), has its yield to APR ratio at the (92%) level – only possible at a moderate growth rate (20‐30% p.a.) and has its loan loss provisioning requirement at the minimum 1% of portfolio, required by the new RBI guidelines

These are only just possible in the current regime of enhanced emphasis on client protection, client level income assessments and repayment stress in an environment where the credit culture has been vitiated by the public debate about MFI behaviour.  Thus, with the interest and margin caps, most MFIs can expect to do little more than break‐even, and even that will require significant effort.

However, funds from foreign lenders will help to sustain and moderately expand portfolios             enabling, thereby, some reduction in operating expense ratios.  To that extent the liberalisation of foreign lending to MFIs is an important step forward.  Funds from foreign lenders at less than 10% will enable MFIs to earn a slightly higher return at a lower interest rate to clients, the paper says.