Business | Investment
India microfinance will offset profit fall
New Delhi will soon pass bill putting central bank in charge of regulations to help improve flow of credit to poor
- Bloomberg
- Published: 00:00 August 26, 2011
- Image Credit: Bloomberg
- Shoppers at a market in Mumbai. India’s 10-year bonds rose, pushing yields down, on speculation a drop in commodity prices will help reduce inflation.
Mumbai: India's banks say that a revival in lending to the nation's poorest citizens will help offset the impact on profits of a slowing economy and bad loans.
The government will "soon" pass a bill putting the Reserve Bank of India in charge of regulating microfinance, a move that will spur lending, deputy governor K.C. Chakrabarty said.
Bank of Baroda and Union Bank of India say their loans to microfinance firms, which typically lend $5,000 (Dh8,300) or less, will rise more than 10 per cent in the year ending March, compared with 8 per cent in 2010.
A jump in central bank policy rates to a three-year high has spurred an increase in delinquent loans and cut demand for credit, hitting lenders such as the State Bank of India, whose profit shrank 46 per cent in the second quarter.
Since the microfinance bill was published on June 20, the yield on State Bank's 2015 debt has dropped 25 basis points, compared with a 82 basis point advance for 2013 bonds of Bank of China, according to indications on rates compiled by Bloomberg.
"Microfinance is serving as a compensator in this regime of high interest rates, pressure on margins and greater risks of default," M.D. Mallya, Mumbai-based chairman and managing director at the state-owned Bank of Baroda, said.
"The overall drop in loan demand is partly offset by micro-credit growth, which we believe is going to be key to our performance in coming quarters."
Prime Minister Manmohan Singh's government is amending laws to free microfinance from provincial regulations and improve the flow of credit to the poor, in a bid to boost rural demand as economic growth decelerates to the slowest pace since 2009. Non-urban consumers account for almost 8 per cent of gross domestic product in India, where almost 70 per cent of the population lives on less than $2 a day, according to World Bank estimates.
Credit to microfinance firms from India's banks dried up late last year as the southern state of Andhra Pradesh cracked down on abuses amid reports of farmer suicides. The government of the state, India's largest market for the loans, waived microfinance loans where a sum of twice the principal had been repaid, capped interest rates and restricted debt collections.
Mallya at Bank of Baroda predicts loans to the industry will grow faster as regulations are streamlined. M.V. Nair, chairman and managing director of state-owned Union Bank gave a similar forecast.
An opportunity
Non-performing loans at the Mumbai-based State Bank rose to 3.52 per cent of total credit in the second quarter from 3.14 per cent a year earlier, forcing the bank to increase provisions.
The annual pace of growth in conventional loans slowed to 18.5 per cent last month, the least since May 2010, as the central bank boosted its benchmark repurchase rate by 0.5 percentage point to 8 per cent on July 26, the 11th increase in 16 months aimed at cooling inflation.
The reforms promised are "an opportunity" for State Bank, Diwakar Gupta, chief financial officer at the government-owned lender, said. "Policymakers have to ensure the bill is passed with enabling powers to the regulator because loan demand from the small borrowers is rising whether urban or rural."
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