Banks deny MFIs request for Rs 1,000-cr to aid liquidity

Bankers have turned down a request by microfinance institutions (MFIs) to create aRs 1,000-crore fund to help them recover from losses arising due to mass defaults in Andhra Pradesh.

Last month, after banks approved restructuring the loans of five MFIs under a corporate debt restructuring (CDR) process, banks were no longer interested in creating the fund, said sources in the sector.

Soon after the Andhra Pradesh government curbed fresh lending and recovery by MFIs, the Microfinance Institutions Network (MFIN) had requested banks to set up such a fund to infuse liquidity into the cash-strapped system. MFIN had sought intervention from the Reserve Bank of India to bring together public and private sector banks under the aegis of Small Industries Development Bank of India (Sidbi) to set up the fund. It had also initiated informal discussions with International Finance Corporation, part of the World Bank, and FMO, the entrepreneurial development bank of the Netherlands, to contribute to the fund.

“We did take forward the proposal with the Reverse Bank of India, but the response of the banks was negative. They did not show any interest in having the fund, so it was eventually scrapped,” said Alok Prasad, CEO of MFIN.

MFIs which had opted for CDR were Share, Spandana, Asmitha, Trident and Future Financial. Under CDR, an indebted company is generally given relaxation in the repayment schedule and interest rates, on certain conditions such as restrictions in fresh lending and fresh borrowing. The option is generally available only to MFIs with an equity component of more thanRs 15 crore.

Banks are yet to begin fresh lending to MFIs due to high risk of defaults in Andhra Pradesh, where the biggest MFIs are based. As a result, MFIs have stopped fresh lending to the sector, though banks need to meet their their priority sector lending targets, which are 40 per cent of their gross advances. Due to lack of credit to the sector, several banks have failed to meet these targets.

The RBI-constituted panel under Y H Malegam had suggested restrictions such as capping the MFI lending rate at 24 per cent and ensuring such institutions do not lend more thanRs 25,000 crore to a single borrower, among other measures.

In his Budget speech, finance minister Pranab Mukherjee had also announced creation of an equity fund ofRs 100 crore for MFIs, called the India Microfinance Equity Fund.