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Rural Growth Risk Accelerates Microfinance Rules: India Credit

Rural Growth Risk Accelerates Microfinance
Microfinance is the best way for rural consumers, who account for 7.8 percent of gross domestic product, to get access to funds to boost farming and village industry, Rupa Rege Nitsure, an economist at state-owned Bank of Baroda, said in Mumbai yesterday. Photographer: Adeel Halim/Bloomberg

India is accelerating national microfinance regulations after a local government ruling crippled financing for the industry and contributed to a jump in the cost of insuring bank debt against default.

A Reserve Bank of India panel will submit recommendations by January, which the Ministry of Finance will use to introduce the first Micro Finance Bill as early as March. SE Investments India Ltd., the nation’s second-biggest listed microlender, said Andhra Pradesh state’s crackdown on lending methods in the 225 billion rupee ($5 billion) market will result in a “death blow” if remedial measures aren’t taken immediately.

“The success of the microfinance process is imperative,” Sunil Agarwal, a managing director at SE Investments in New Delhi, said in a Nov. 26 interview. That’s needed “to achieve what the government has planned for the section of the population that has no access to any kind of formal credit,” Agarwal said.

Credit-default swaps tied to the debt of State Bank of India, the nation’s biggest lender and a proxy for sovereign bonds, jumped 24 basis points from a six-month low on Nov. 8 to 179 Dec. 1, according to CMA prices. Contracts used to insure bonds of the second-largest, ICICI Bank Ltd., climbed 26 to 213.9.

The rupee weakened 3.2 percent last month after the microfinance industry seizure, a bribery probe into developer lending and a mobile phone licensing scandal.

Three-Year Plans

India’s central bank asked lenders to make three-year plans to provide banking services to the 145 million households that don’t have access, Deputy Governor K.C. Chakrabarty said Nov. 27. The amount of loans outstanding as of Sept. 30 involved 25 million people, compared with 40 billion rupees to 8 million people in 2007, Deloitte Touche Tohmatsu India Pvt. estimates.

Elsewhere in India’s credit markets, the yield on India’s 10-year bonds was poised for its biggest weekly increase since August. The rupee headed its biggest weekly gain in two months.

Videocon Industries Ltd. is selling $200 million of convertible bonds. The consumer electronics maker hired Credit Suisse Group AG and Standard Chartered Plc to manage the sale, Suresh Hegde, Videocon’s finance chief, said in a phone interview from Mumbai yesterday. The last convertible sale by an Indian company was in July, when Shiv-Vani Oil & Gas Exploration Services Ltd., a New Delhi-based energy firm, sold $80 million of the securities.

Down From 2009

Indian firms raised $1.4 billion selling convertibles this year, compared with $3.9 billion in 2009, according to data compiled by Bloomberg. Issuance was $424 million in 2008, the lowest since 2003.

The yield on India’s 7.8 percent note due May 2020 has climbed 12 basis points this week to 8.09 percent, heading for the biggest increase since August, according to the central bank’s trading system. The yield is 513 basis points, or 5.13 percentage points, above Treasuries. Comparable rates in Brazil and China were 12.53 percent and 3.94 percent, respectively.

The rupee climbed 1.6 percent this week to 45.11 per dollar as of 10:13 a.m. in Mumbai. The rupee earlier reached 45.105, the highest since Nov. 26 and set for its best week since Oct. 1.

Credit-default swaps pay the buyer face value for the underlying securities or cash equivalent if a borrower fails to adhere to debt agreements. A basis point is $1,000 annually on a contract protecting $10 million of debt.

New Rules

On Oct. 15 the southern Andhra Pradesh state waived microfinance loans where a sum of twice the principal had been repaid, ordered collections by lenders at specific offices, and asked microfinance institutions to register with state authorities, the government said on its website.

Banks that provide funding to microfinance lenders, who are banned from taking deposits, stopped loans nationwide in response to the rules, Royston Braganza, chief executive officer at Grameen Capital India Ltd., said Dec. 1.

The government will introduce the Micro Finance (Development & Regulation) Bill, 2010, after central bank recommendations, Namo Narain Meena, junior finance minister, said in a written statement to Parliament on Nov. 23.

“The RBI is absolutely passionate about financial inclusion,” said Braganza at Grameen. “Large economies are betting that India and China will be growth engines, and there is no reason why local micro-entrepreneurs should not get the benefit of plugging into the global economy.”

SKS Tumbles

SKS Microfinance Ltd., the biggest microlender, has dropped 35 percent since Oct. 16 to 714 rupees after the company sold shares at a price of 985 rupees in its initial public offering in August.

“The microfinance model is extremely important,” said S. Sridhar, chairman and managing director of state-owned Central Bank of India. The nation’s “interiors are credit-starved.”

Prime Minister Manmohan Singh wants to sustain more than 9 percent economic growth for at least three decades to help reduce the 828 million Indians that live on less than $2 a day, according to World Bank estimates. The $1.3 trillion economy expanded 8.9 percent in the September quarter, the government said Nov. 30.

Microfinance is the best way for rural consumers, who account for 7.8 percent of gross domestic product, to get access to funds to boost farming and village industry, Rupa Rege Nitsure, an economist at state-owned Bank of Baroda, said in Mumbai yesterday.

Axis Bank said about 22 percent of its 13 billion rupees in outstanding microcredit is in Andhra Pradesh.

“We are lending to the microfinance firms where they need assistance,” Somnath Sengupta, the Chief Financial Officer at Axis in Mumbai, said in an interview on Nov. 23. “But we are selective about it.”

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