Over the last month or so there has been huge debate around how and to what extent Micro finance institutions (MFIs) in India be regulated. Quite surprising to note that despite having SEBI and RBI as active watchdogs of Indian economy, we are debating on issue of regulation which otherwise should have been like a breath within a living being.
Criticizing MFIs for charging higher interest rate needs to be scrutinized from the perspective of cost of servicing such a credit- which has no collateral, is small in ticket size, lent to borrowers with no credit history and in most cases the first charge on assets is hypothetical. MFIs need to hire enough manpower to service the loans and ensure collections.
Note this- Manpower cost as a percent of revenue is 24-28% for MFIs compared to 12-15% for public sector banks and 5-8% for private Indian banks.
I am silent on lending practices and NIM of 2 X approx. compared to traditional banks.