With Bandhan now a bank, and a number of microfinance institutions (MFIs) set to become small finance banks, smaller microfinance institutions are witnessing a sharp rise in bank funding.
For example, Kolkata-based Village Financial Services has got bank funding of around Rs 180 crore so far this financial year, against Rs 80 crore in the previous one. Arohan, another Kolkata-based MFI, expects its bank funding to go up from around Rs 350 crore last year to about Rs 600 crore this year, a rise of 71 per cent.
Between the first and second quarter of the current financial year, bank funding to MFIs rose 127 per cent to Rs 8,236 crore, according to data from the Microfinance Institutions Network (MFIN).
“In general, bank funding goes up in the second quarter, as banks are required to fulfil their priority sector lending [PSL] target. Earlier, Bandhan used to absorb a significant amount of priority sector lending by banks. Now that it is no longer an MFI, a lot [more] of bank funding is available for MFIs,” said Ratna Vishwanathan, chief executive officer of MFIN.
Bandhan, which graduated to a bank from an MFI last August, used to corner Rs 6,000-7,000 crore of bank funding, close to a fourth of the total from this source for the segment. “With Bandhan no longer an MFI, our funding has considerably expanded. We are now looking at newer geographies like Tripura, Sikkim, Odisha and Uttarakhand for expanding our operations,” said Kuldip Maity, managing director, Village Financial Services.
Banks mostly fund MFIs to meet their PSL targets. Domestic scheduled commercial banks need to give 40 per cent of their total credit to sectors classed as “priority”.
Apart from Bandhan, eight MFIs have got licences to become small finance banks.
These MFIs need to convert into a small finance bank by April 2017, after which loans to these institutions will fail to quality of priority sector lending. As a result, banks are wary to lend them under PSL category, as the loans are generally of 18-36 months tenure.
"Bank funding has significantly gone up, which has resulted in higher disbursals by the MFIs. As a result, the interest rates charged by banks have also come down," said, Manoj Kumar Nambiar, president, MFIN (Microfinance Institutions Network).
In the last one year, the cost of funds for MFIs has gone down by at least 100 basis points, from 15.50% to about 14.50%.
As on September the gross loan portfolio of the MFIs, excluding Bandhan, was about Rs 36600 crore, a growth of 76% over the same period last year.