MFIs seek RBI directive for Rs 1,000-cr fund by banks

Faced with a liquidity crunch, microfinance companies have asked the Reserve Bank of India (RBI) to direct banks to set up an emergency fund of Rs 1,000 crore to help them tide over slowdown in their business.

Sources said the Microfinance Institution Network (MFIN) is trying to convince the RBI in this regard.

The micro finance sector has been reeling under a liquidity crisis after the Andhra Pradesh government issued an Ordinance to control interest rates charged by micro finance institutions (MFIs) and also to check the coercive recovery tactics adopted by these firms.

From time to time, RBI had helped various sectors to deal with the money shortage. At the time of global financial crisis, the central bank had announced special liquidity injection measures for the mutual fund industry when it was facing a cash shortage.

Sources said the MFIN has had discussion with RBI seeking assistance. MFIN has requested RBI to ask the Small Industries Development Bank of India (Sidbi) and public and private sector banks to extend the funding.

MFIs offer credit to the poor after sourcing the funding from banks. While the banks lend to the MFIs at 12-13 per cent, the MFIs in turn charge interest rates as high as 36 per cent.

MFIs say high interest rate is charged because the cost associated to lending in rural areas is too high.

The Andhra Pradesh Ordinance on October 15 impacted the collections of MFIs. Country's only listed micro finance company SKS said that its collection for November had come down and in future could affect its profitability.

On last Friday, Finance Minister Pranab Mukherjee had said the Centre did not intend to strangulate the micro finance sector.

"My idea is not to strangulate them (MFIs), but to regulate it so that the interest that they charge is not exorbitant and the method of realisation, under no circumstances, should be quick," he had said.