Sa-dhan seeks new MFI refinance body, calls for more equity support

Sa-dhan has urged the government to set up a dedicated MFI refinance body and increase flexibility in the India Microfinance Equity Fund to address funding challenges in the microfinance sector

Sa-dhan, the self-regulatory organisation for microfinance institutions (MFIs), has sought the setting up of a new refinancing body and greater flexibility in the India Microfinance Equity Fund (IMEF).

 

“We have sought a deepening of the current funding architecture available to the sector. As on date, we are dependent on banks for our funding needs, and equity is not easily available,” said a senior Sa-dhan official.

 

As on date, the Micro Units Development and Refinance Agency Bank (MUDRA Bank) lends at low interest rates to MFIs and non-banking financial institutions (NBFCs), which, in turn, finance small businesses. A suggestion has been made that MUDRA Bank, which was set up under the Pradhan Mantri Mudra Yojana, be converted into an exclusive provider of refinance for dedicated MFIs. The argument here is that MUDRA Bank, in its current avatar, offers refinance to banks, small finance banks (SFBs), and regional rural banks (RRBs), which are covered by the National Bank for Agriculture and Rural Development (Nabard).

 

Sa-dhan’s data for the third quarter of the current financial year (Q3FY25) show the sector’s assets stood at Rs 4.14 trillion, a year-on-year (Y-o-Y) growth of 7.6 per cent, but a quarter-on-quarter (Q-o-Q) decline of 4.3 per cent.

 

Meanwhile, the IMEF continues to be a sticking point with MFIs, as not many are able to avail themselves of funds from it. The annual report of Small Industries Development Bank of India (Sidbi) for FY24 says an assistance of a mere Rs 19 crore was sanctioned to 10 MFIs. In the run-up to the Union Budget for FY25, it was speculated that a fund akin to IMEF may be set up given the funding needs of MFIs. IMEF was set up with an initial corpus of Rs 100 crore in FY12 — focused on smaller MFIs — which was increased by Rs 200 crore in Budget FY14, taking the total corpus to Rs 300 crore. In FY20, IMEF was transferred to MUDRA Bank from Sidbi; this was reversed on April 4, 2022.

 

Another issue is that the maximum amount available to an MFI under IMEF is Rs 5 crore. Industry sources said they have conveyed to the finance ministry and the Reserve Bank of India (RBI) that both this limit and the corpus under IMEF should be increased — or, alternatively, another funding mechanism for MFIs should be set up under Nabard.

 

Incidentally, a study by rating agency Icra on the impact of IMEF in 2015 noted that it should increase its proportion of equity funding for NBFC-MFIs with a strong track record. IMEF funds in the form of equity would have a greater impact on the operations of these MFIs, as it would increase their ability to raise more equity from both foreign and domestic institutional investors.

The talk points

• Convert MUDRA Bank, set up under the Pradhan Mantri Mudra Yojana, into a refinancing body for standalone MFIs
• Offer more flexibility to the India Microfinance Equity Fund (IMEF) and increase its corpus from Rs 300 crore
• Increase the maximum amount available to an MFI under IMEF beyond Rs 5 crore
• SIDBI’s annual report for FY24 says an assistance of a mere Rs 19 crore was sanctioned to 10 MFIs from the IMEF corpus