Banks agree to resume MFI lending, but counsel caution

Banks have agreed to normalise lending to microfinance institutions (MFIs), but have asked them to be extremely cautious to prevent slippages. MFIs 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.

Banks had become reluctant to lend to MFIs, especially those that had a large exposure in Andhra Pradesh and held weekly collection of dues. Loan recovery by MFIs was seriously hit after the Andhra government asked them to register with state agencies and banned weekly collections.

The Andhra Pradesh Micro Finance Institutions (Regulation of Money Lending) Ordinance, 2010, which came into effect on October 15, was promulgated after controversies surrounding MFIs’ lack of transparency, usurious interest rates and strong-arm recovery tactics.

According to sources, Hyderabad-based MFI Basix Group Chairman Vijay Mahajan visited O P Bhatt, chairman of State Bank of India, earlier this month to request a normalisation of fund flows. Mahajan also presented the situation to other bankers. According to bankers, Mahanjan told them while recoveries from Andhra have dropped drastically, they were more than 98 per cent from other states.

“We have agreed to take steps to normalise the situation. But loans should not turn into NPAs (non-performing assets),” said a banker who attended the meeting. “We said if there is a chance of a loan not being repaid in 90 days, then take pre-emptive measures,” he added.

Mahajan, who also proposes to set up a business continuity fund with a corpus of Rs 1,000 crore for small and medium MFIs working outside Andhra Pradesh, requested banks to participate in setting up the fund. Banks are said to have considering the request.

The Reserve Bank of India has set up a committee under Y H Malegam to study MFIs and suggest ways to make their interest rates reasonable. RBI regulates only MFIs registered as non-banking finance companies, which cover over 80 per cent of the microfinance business.