Banks choke flow of funds to MFIs

In a fresh blow to microfinance institutions, banks are refusing to lend them even a sanctioned line of credit, following recent controversies over opaque corporate governance and usurious interest rates.

The ensuing liquidity crisis has prompted many MFIs to seek a moratorium on loan repayment to banks.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.

Interest rates charged by MFIs vary between 18 per cent and 32 per cent, bankers said.

Asit Pal, executive director at Corporation Bank, confirmed: "We are not sanctioning fresh loans to MFIs, and the line of credit is also on hold."

Another senior executive from a south India-based private bank said: "We also find that MFIs are resorting to an 'ever-greening' strategy, which means extending loans to defaulters to repay existing loans. We have kept disbursements in abeyance until further clarity from the regulator emerges."

Some MFIs played down the impact. While admitting that banks have stopped giving them loans, they expect normalcy to return soon.

"No new loans have been sanctioned in the last couple of weeks. Banks had expressed anxiety over lending to MFIs and this led to many discussions. But after the finance ministry and Andhra Pradesh High Court intervened, things are returning to normal," said Vijay Mahajan, chairman of Bangalore-based MFI Basix.

P N Vasudevan, managing director at Equitus, said, "Since no bank has told us that they are not going to lend, we assume they will continue to."

Bankers said they were awaiting clarity from the report of the Y H Malegam committee, which was appointed by Reserve Bank of India last week to study the sector and suggest ways to make interest rates charged by MFIs reasonable.

At least three MFIs, including Share, one of the largest in the country, are planning to pitch for a moratorium on repayment for three months.

"Banks are shying away from giving loans, and we are asking for a three months' moratorium for repayment of instalments through (microfinance industry body) MFIN," said Udaia Kumar, chairman & managing director of Share.

MFIN , or Microfinance Institutions Network, will discuss the moratorium at a meeting soon and take up the matter with a newly-revived forum of MFI lenders, led by Small Industries Development Bank of India, which in turn is expected to take up the matter with the Indian Banks' Association, said a source close to the development.

"Other bigger MFIs have no option but to seek a moratorium as their cash flows are weakening," said a source involved at the field level study for MFIs.

R Ramachandran, chairman & managing director at Andhra Bank, said his bank "has a limited exposure to the MFI sector.

"MFIs are shifting from a monthly to a weekly repayment model, which might require some rebalancing. So far, we have not received any request for a moratorium, but if we get one, we will evaluate the proposal."

An MFIN spokesperson refused to comment on the issue. "I would not comment on the matter now, as the situation is very fluid," said Alok Prasad, chief executive officer of MFIN.

After the Andhra Pradesh High Court allowed MFIs to resume operations yesterday, weekly collections fell to as low as 10-20 per cent in a few pockets in the state.

"All roads are blocked for MFIs, and they have no option but to comply with the norms. People have started refusing to make repayments.

"The entire system is set to collapse and the liquidity conditions of MFIs are so bad that if they don't get the moratorium, some will not be able to even pay salaries," said Narendra Prasad, an analyst working with MFIs in Andhra Pradesh.

Overall, MFIs could collect as much as 50 per cent of dues. This is a stark contrast to the roughly 99 per cent recovery in general in the sector, according to MFIs.