Banks that refuse loans to MFIs, even for sanctioned amounts

KOLKATA: Several banks reject loan claims by microfinance institutions (MFIs), even for those within the sanctioned limits that can stifle credit flow in micro and standalone segments.

While denying liquidity support from banks has already made life difficult for MFIs, refusing even sanctioned loans is even more difficult. This may result in lower lending to end-borrowers, leading to an increase in default on them, even after moratorium lifted. Many of the companies that rely on MFIs cannot survive without the cash flow.

The situation is more suffocating for smaller and medium sized units. Even the larger companies on the top-10 list aren’t comfortable either, say people familiar with the matter. At least three executives, ET spoke with, said that either they have not received communications from their lenders or it is moving slowly.

“Everything is standing still,” one of them said.

According to Sa-Dhan, an association or micro-finance company, about 24% of MFIs received some form of funding support after March 24, when the nationwide shutdown began. But sanctioning loans does not guarantee disbursement.

“I doubt whether small and medium-sized MFIs can get loans, especially if the moratorium is extended by another three months, which is being discussed,” said a chief microfinance chief executive. “Most MFIs will not have the cash to cover their operating expenses and will tend to use the loan for these expenses rather than lending as moratorium would be in place,” he said.

The banks had placed a massive Rsh 8.42 lakh crore with Reserve Bank of India (RBI) on Monday through reverse repo, earning nearly 3.75% in a reflection that they do not want to lend, even as many less-rated companies and MFIs are in dire need of funding.

India has about 145 registered MFIs including 68 NBFC MFIs serving over 5.6 crore borrowers with outstanding loans of Rs 2.11 lakh crore.

Last month, a group of about 100 small micro finance companies with less than Rs 200 crore loan portfolio sought conversion of their outstanding bank loans to equity when the cash flow is dried up.

While several micro-lenders reopened branches last week, they are yet to pay out loans, though they plan to provide small emergency loans to their borrowers to help them summarize their small businesses. However, much will depend on whether they get bank financing.

“If we do not deliver a new dose of loans to micro-borrowers, many of them may begin to withhold repayment even after the moratorium has been lifted. It’s a cycle. When it breaks down, it’s hard to keep going, “said Kuldip Maity, CEO of Kolkata-based Village Financial Services.

Half of MFIs may have difficulty paying salaries for May if the liquidity situation does not improve. About 70% of MFIs may not meet repayment obligations to their banks beyond July, Sa-Dhan had told the RBI on Monday.

“RBI should allow loan restructuring if a step-by-step credit is given, as the need for hourly loans for micro-borrowers is fresh liquidity,” said one of the persons mentioned above.

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