Banks shy away from funding microfinance firms

Banks shy away from funding microfinance firms

Leading banks are refusing to lend the microfinance institutions funds after the recent controversy over malpractices in the sector involving poor borrowers being led to suicides.

Microfinance institutions (MFIs) face tough days ahead, as banks are refusing to lend them funds after the recent controversy over malpractices in the sector involving poor borrowers being led to a debt trap and suicides, making it difficult for the micro-lenders.

Though MFIs have urged banks not to stop funding them, the former have, in principle, decided to wait till January-end next year, when the Reserve Bank of India's (RBI) appointed Y. H. Malegam Committee, constituted to study the sector and suggest ways to make interest rates charged by MFIs reasonable, comes out with its report.

"We have not refused to fund MFIs, but instead have asked them to hold for a while. We are not turning down proposals from MFIs for fund. But we would wait for the RBI's Malegam Committee report. There will be more clarity after that. Multiple lending created a bubble," Axis Bank President (agri & rural banking) S. K. Mitra told Mail Today on the sidelines of the India Economic Summit.

He further said the banks have a stake of over Rs 26,000 crore in MFIs.

"We have a stake of around Rs 1,600 crore in MFIs and our immediate concern is to get back our money," he added.

They raise 75-80 per cent of their funds via bank borrowings, 15 per cent from equity and another 10 per cent from other sources like cash securities. Interest rates charged by MFIs vary between 18 per cent and 32 per cent, bankers said.

The banks have been lending to MFIs at 10.5 per cent to 12 per cent till now. The institutions later dispersed small loans to especially the poor at over 34 per cent per annum.

Mitra said the banks will also rate MFIs according to the practices they follow and also based on performance.

"We had not actually read the situation well earlier. We will now differentiate between MFIs which are charging more and those charging less. The latter will get the benefit," he pointed out.

Despite all odds, the banking industry sees a bright future ahead for the MFIs in India. "The future of MFIs is bright. We are not so enterprising as MFIs. Banks can do it for some time, but I am not sure if commercial banks will stand by the poor," he added.

MFIs now face massive fund crunch, as the recovery process has slowed down, following restrictions from the government. The institutions are also seeking emergency funding from banks after defaults jumped amid a clampdown on lending practices.

The lenders are seeking Rs 1,000 crore to set up an emergency liquidity fund, Vijay Mahajan, head of the Microfinance Institutions Network (MFIN) said. MFIN is an industry body of micro-lenders.

The network is currently working with multiple credit bureaus that will enable them to share data on borrowers' loan histories by April 2011. The bureau would be in a position to provide data to MFIs for their credit decision-making process.

Vikram Akula, founder and chairperson of SKS Microfinance, told delegates at the India Economic Summit that RBI should allow MFIs to serve as Banking Correspondents. This would help in mobilising savings from the poor.

Akula said savings as a non-credit product is more important to the poor than credit, as they do not have safe places to put their saved incomes.

Courtesy: Mail Today