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Fresh trouble for MFIs as cost of funds go up

Somasroy Chakraborty & Abhijit Lele  |  Mumbai 

Successful closure of CDR raises hopes of stability returning to the sector.

While banks have resumed lending, albeit selectively, to micro finance companies, the latter’s cost of funds has gone up sharply.

“We are ready to borrow funds at 16-17 per cent interest. Margin compression is now a secondary issue for us. The primary objective is to sustain our business and for that we need fresh funding,” said Kishore Kumar Puli, promoter and chief executive officer of Trident Microfin.

Trident was one of five micro finance opting for for corporate debt restructuring (CDR). Puli said the average cost of funds used to be 10-12 per cent before the crisis broke out in the sector in Andhra Pradesh last October.

The release of the draft Micro Finance Institutions (Development and Regulation) Bill earlier this month, adoption of some of the broad recommendations made by the Malegam committee and successful closure of CDR for some raised hopes of stability returning to the sector.

However, most institutions, barring a few, say the crisis persists.

“Things never stabilised. While banks have started sanctioning loans selectively, disbursements are still not happening. The issues related to Andhra Pradesh have started hitting other states. Bad travels very fast and local politicians in some places of Maharashtra, Karnataka and Orissa are trying to disturb the recovery of micro finance loans,” said Mathew Titus, executive director of Sa-Dhan, an association of these institutions.

According to him, several borrowers are also reluctant to repay their loans to microfinance institutions as many of these micro-lenders are not in a position to offer fresh funding because of their tight liquidity position.

Their margins are also threatened as the Reserve Bank of India has asked these to cap their lending rates at 26 per cent to claim priority sector status on funds borrowed from banks.

“The lending rates will depend on credit ratings. Since the rating for the sector has come down, naturally the rates have gone up,” said a senior official of a Mumbai-based state-run bank. He said lending rates for these are currently 13-15 per cent.

Even institutions based outside Andhra Pradesh and which emerged relatively unscathed from the crisis have seen growth muted.

“We are going to take a hit. Though we have been able to maintain our scale and size, our growth is likely to be flat this year. There is definitely a slowdown in disbursals for the industry and sanctions are still taking time,” said Tara Thiagarajan, chairperson and managing director of Madura Micro Finance, a Chennai-based lender.

While banks claimed they’d again begun lending to these institutions and a few micro-lenders like Chennai’s SMILE Microfin and Kolkata’s Bandhan Financial Services have announced fund raising programmes, industry experts said the crisis remained.

Such as the that the the country’s oldest micro finance company, Bhartiya Samruddhi Finance, promoted by social entrepreneur Vijay Mahajan, was on the verge of closure due to lack of bank funding. Mahajan did not respond to calls made by Business Standard.

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First Published: Mon, August 01 2011. 00:42 IST
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