8/2/2019 Ma Leg Am

1/16

Unravelling the Malegam Conundrum

Merge or Submerge

8/2/2019 Ma Leg Am

2/16

Recommends NBFC MFI new category > 90% total assets in Micro financeLikelihood of acceptance- Very High

Impact on sector

NBFCs having diverse portfolio inclusive of Microfinancehave to redefine business.

Lesser product innovation Mainstream NBFC may not have Micro finance as one of

the activities Serious players to enter Microfinance as they need to have

minimum 90% Micro finance to be classified as NBFC MFI

8/2/2019 Ma Leg Am

3/16

Borrower Income < 50,000 per annum Loan total - Rs 25,000/Borrower Tenure - 12 months (Loans upto 15,000) Tenure - 24 months ( Loans above 15,000) Loan without collateral Repayment weekly/fortnightly/monthly

(As per borrower choice) 75% of total MF loan for income

generation

8/2/2019 Ma Leg Am

4/16

Likelihood of acceptance- High with minor changes (Income limit- 1 lakh and lending limit 50,000)

Impact on sector Unless lending limit is increased there would be issues in

lending in South and urban areas where ticket size andincome is high

MFI has to move newer areas and leave many urbanpockets. This will increase reach across the country and

diversify portfolio in long run. In short term MFIs have to curb growth in current areas to

be Malegam Compliant Flexibility in borrower repayment is positive for the sector

in stead of mandatory monthly collection as per APordinance

8/2/2019 Ma Leg Am

5/16

8/2/2019 Ma Leg Am

6/16

Sectoral Impact Difficult to calculate cost of funds especially smaller

MFIs who do not have professionals on roll Consolidation of existing MFIs as many smaller ones

will not survive New MFIs will req. min 5 yrs to break even PE investment will decline to sector This will reduce growth pressure on industry

Very few NBFCs take security deposit and such impactwill be limited to those few MFIs MFIs have to reduce expenses drastically Low margin would discourage new players in the sector

8/2/2019 Ma Leg Am

7/16

Recommendation Borrower member of one SHG/JLG Maximum 2 MFI per borrower

Moratorium period Sanctioning in central location and > 1 person

involved in sanctioning Credit info bureau of borrowers to be

established and all MFIs are members

8/2/2019 Ma Leg Am

8/16

Sectoral Impact Practically not possible to ensure borrowers are in more

than one group. However this will discourage MFIs toconsciously break SHG of banks to have fast growth.

Many parts of South borrowers have already taken >two MFI loans. MFI has to migrate new areas

Credit bureau is a progressive measure and would helpto curb multiple lending in medium term

Sanctioning by > 1 person would ensure better controland may require more expenses by the smaller MFI.Most of the larger MFIs have current process ofapproval by more than one person

8/2/2019 Ma Leg Am

9/16

Recommendation- Min. Networth - 15 CroreSectoral Impact Players having networth substantially below 15 crore

will find it difficult to raise equity in current

environment There will be consolidation of smaller players MFIs not affected AP crisis are likely to take over such

MFIs

MFIs not finding takers would not be able to bankfinance and face closure This will serve as entry barrier and trend of senior

bankers and professionals setting up MFIs willsubstantially reduce

8/2/2019 Ma Leg Am

10/16

Recommendation CAR- Increasing from 12% to 15%

Category

No. of days past

due date

Current

Provisions %

Proposed

Provisioning

Standard

0-30

0.25%

Highest of 1% of O/S

or 50% of over dues> 90 days or 100% >180 days overdue

31-60

61-90

Sub Standard (1) 91

120

20%Sub Standard (2) 121 150

Sub Standard (3) 151 180

Loss Asset >180 100%

8/2/2019 Ma Leg Am

11/16

Sectoral Impact MFIs across India have to provide higher provisions

(1%) impacting profitability immediately but good onlong run.

AP based MFIs have to provide much higher in 90-180days bracket and adverse impact on profitability/capitalnext quarter itself.

Capital adequacy of 15% would be a challenge for MFIs

and curb their growth plan in short term Higher CAR ( 12% to 15%) requirement would reduce

leverage of MFIs and helpful in the long run MFIs having AP exposure may find it difficult to meet

double whammy of higher provisioning & capital

adequacy requirement

8/2/2019 Ma Leg Am

12/16

Recommendation Separate reporting of Assignment & Securitisation In case of recourse case, it would be considered for CAR

calculation In case of non recourse, credit enhancement to be

reduced from capital Bank to purchase portfolio which has adhered norms as

per regulation and is accountable for it. MFIs providing > 15% of credit enhancement ( which is

likely in current environment) has to provide morecapital for securitisation and assignment.

8/2/2019 Ma Leg Am

13/16

Impact on Sector Bring transparency with disclosures of securitisation

and assignment Stringent CAR norm for assignments would discourage

overleveraging through assignment AP MFIs unable to raise capital and using Portfolio sale

off as a tool to maintain CAR will have problem Banks have to improve upon due diligence on portfolio

assignment as they are primarily responsible for it Banks may to incur additional cost to ensure due

diligence on portfolio

8/2/2019 Ma Leg Am

14/16

8/2/2019 Ma Leg Am

15/16

Sector Impact Very Positive with enhanced RBI monitoring the sector

would be better controlled and immediate correctiveaction taken

MFI Association and Bank also has to take a key role inmonitoring & Compliance

This would give credibility to the sector and MFIs nonadhering would face severe consequences

Provision of penalty and additional power to RBI will becreate fear among MFIs for any violation of norms

8/2/2019 Ma Leg Am

16/16

Recommendation Credibility to the sector with closer RBI monitoring PSL Status continued Not part of Moneylending Act

Would overrule AP ordinance Domestic social capital fund may be established Greater disclosure norms, better Governance

requirement helpful in long run

Challenges AP Govt. still may not accept it and challenge it in Court