Guarantees for MFI loans to kickstart lending in rural areas, say experts

Scheme extended to term loans from banks to MFIs for on-lending; tenure of loan extended to 36 months from 18 months earlier, with cap on interest rate charged by banks

The credit guarantees to facilitate micro loans are expected to improve liquidity for MFIs, especially the smaller ones, and kickstart lending from the second quarter after very low volumes in April-June period.

Alok Misra, chief executive and director, Microfinance Institution Network (MFIN) said this scheme will cover term loans from banks to MFIs, unlike only commercial paper and non-convertible debentures in last year’s scheme. It will facilitate flow of funds in these difficult times.

Guarantees will be provided to banks for loans to new or existing NBFC-MFIs or MFIs, for on lending up to Rs 1.25 lakh to approximately 2.5 million small borrowers. The guarantees cover for funding provided to MFIs and NBFC-MFIs till March 31, 2022 or till guarantees for an amount of Rs 7,500 crore are issued, whichever is earlier, according to the finance ministry presentation.

MFI executives said the revision is improved in three ways. First, the tenure of the loan covered has been extended to three years (36 months) from 18 months earlier. The earlier scheme gave limited time to utilise resources, but now the tenure is longer. Second, there is a cap on the interest rate charged by banks. So funds will be available at relatively cheaper rates to MFIs.

Third, in funding through debentures, institutions had to provide collateral upfront under the earlier scheme and did not get time to originate fresh loans. And in times of lockdown, with collection efficiency issues, the free portfolio available for collateral was limited. With credit guarantee in place, MFIs will perhaps get 3-4 months to originate the portfolio and pledge it. Also many people who have fallen behind payment schedule also can be funded, they added.

The eligibility of standard customers, pricing directions, focus on new lending and guarantee up to 75 per cent of default amount will ensure benefits for the microfinance customers in a substantive way, Misra said.

P Satish, Executive director, Sa-Dhan, a microfinance industry lobby group, said the combined borrowers base of NBFC-MFIs and Non-profit MFIs is 48.1 million. There are 90 non-profit MFIs and the tally of NBFC-MFIs is over 80.

Small and midsized MFIs were facing challenges in getting funds from banks. The credit guarantees give comfort to banks for lending to Microfinance institutions. The amount (Rs 7,500 crore) will be useful to kick-start the lending after the post-lockdown period. The second quarter should start with disbursement from micor-finance institutions, Satish said.

Sadaf Sayeed, CEO-Muthoot Microfin said the scheme will spur fresh lending from banks to MFIs and will address the fund starvation faced by the industry in the short term. MFIs can reach remote rural sectors of the country and ensure the reach of the credit line to the bottom of the pyramid. It will provide much-needed impetus to credit growth in the rural economy.

According to data from Sa-Dhan, the gross Loan portfolio (GLP) of NBFC-MFIs grew by three per cent from Rs 70,142 crore in September 2020 to Rs 72,242 crore in December 2020 and that of non-profit MFIs by six per cent from Rs 1,772 crore in September 2020 to Rs 1,871 crore in December 2020.