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Bank credit to MFIs doubles in 3 years

Our Banking Bureau  |  Mumbai 

Banks' share in the borrowings of micro-institutions (MFIs) doubled to 28 per cent in the last three years.
The borrowings helped disbursements by MFIs to grow over four-fold from 2002-03 to 2004-05. The total disbursements by MFIs grew to Rs 4,200 crore in 2004-05 from Rs 1,000 crore in 2002-03, according to a study by
said that banks have emerged as the major source of incremental funds for MFIs, due to the latter's reduced access to overseas funds and also by offering at lower interest rates than the apex MFIs.
The cost of borrowings for MFIs, however, continues to be high on account of their high proportion of non-bank borrowings. The high cost of borrowings is not the only constraint in offering cheap loans.
High operating expense ratios (operating expenses as a percentage to average funds deployed), ranging from 4 per cent to 19 per cent for various MFIs, also constrain MFIs' ability to offer microfinance loans to their customers at competitive rates (at say lower than 10 - 12 per cent).
On the other hand, banks lend directly to SHGs at 9-12 per cent per annum under the Another key observation is that MFIs have a higher share of borrowings from private sector banks than from public sector banks.
said this is probably because public sector banks focus more on self help group (SHG)-bank linkage programmes as they have wide branch networks in rural and semi-urban regions. On the other hand, private sector banks, especially the new ones, have limited rural and semi-urban branch networks, and thus channel micro-credit through MFIs.
However, the share of public sector banks in MFI financing increased from 0.1 per cent in 2002 to 9.3 per cent in 2004. expects banks' funding to MFIs to increase further with the current thrust by many banks towards micro-credit.
The increase in the proportion of bank funding has a beneficial effect on the credit risk profile of MFIs, because of the lower cost and resource profile diversity provided by such funds.
In the past, apex MFIs have nurtured MFIs by providing loans at interest rates lower than those offered by banks. However, with the decline in lending rates in the two years up to FY2003-04, banks have reduced lending rates and have been able to fund MFIs at lower interest rates than apex MFIs.
In FY2005-06, expects banks to overtake apex MFIs as the primary source of funding for many large and medium sized MFIs.


First Published: Fri, September 16 2005. 00:00 IST