IL&FS crisis: Microfinance sector likely to take a hit on cash crunch

Growth in the microfinance sector might get constrained due to lack of capital, as banks have stared becoming selective in lending and non-banking finance companies (NBFCs) face liquidity squeeze following the IL&FS crisis.

While bigger Micro Finance Institutions (MFIs) depend upon banks and money market to raise funds, mid and smaller MFIs depend on non-banking finance companies.

The series of defaults by Infrastructure Leasing and Financial Services (IL&FS) and its lending arm on financial instruments almost freezed the financing of NBFCs. It has brought the issue of liquidity management to the fore, pushing the cost of finance and hesitation on lending to finance companies, senior bankers and financial sector executives said.

In the last month, on average, the cost of funds of MFIs has gone up by 25-50 basis points. Capital constraints in the middle of festive season is likely to dent overall growth of the MFIs this year.

Over the last few months, the MFI sector has been witnessing a growth of about 40 per cent on a year-on-year basis. A recent report by credit rating agency Icra suggests that MFIs would need between  Rs 60 and  Rs 90 billion over the next three years to meet its growth plans.

“Their (MFIs and HFCs) borrowing costs are going up in the market. Their issuance (fund raising via market) will happen but raising desired amounts may become uphill task. As a result, they will have a tough challenge to lend at pace, which they did earlier,” a senior SBI executive said.

Echoing challenges ahead for MFIs Kuldip Maity, MD & CEO, Village Financial Services, a Kolkata-based mid-sized MFI said, “Till now, MFIs did not face problems in liquidity, but funding from NBFCs is taking little longer. We expect the situation to improve in the next four-five weeks.”

Mutual funds too have shrunk their lending to the MFIs. “At present, mutual funds are not clear which MFIs they can lend to. With shrinkage of assets under management, the sectoral limit is also a problem for mutual funds. They are waiting for some redemptions to happen so that they free up their limit and they are able to start lending again. The unsecured nature of lending in the MFI sector is further adding to their woes,” said Ajay Manglunia, executive vice-president, Edelweiss Financial Services. The company is engaged in arranging funds for financial sector players.

According to a recent analysis by Northern Arc Capital, an NBFC that connects debt lender to borrowers in the financial inclusion space, many large NBFCs that lend to NBFC-MFIs have slowed down and cut quantum of disbursements.

“We will see NBFC-MFIs trimming their growth plans for the next couple of months. While none of our NBFC-MFI clients sees any risk with respect to ALM, they are worried about the festival season business being hit with lack of clarity on their debt pipeline. This cuts across clients in all asset classes too,” according to Kshama Fernandes, CEO & MD, Northern Arc Capital.

“Pricing might have gone up, especially for smaller MFIs, but as of now there are no liquidity issues as MFI are A&L positive,” said Udaya Kumar, president, Microfinance Institutions Network and chief executive and managing director of Grameen Koota, one of the biggest MFIs. 

It is the smaller players in MFI space that may face more headwinds in resource raising. “Smaller MFIs are more dependent on big NBFCs for refinance. If these NBFCs suffer from tighter liquidity, then all their borrowers might be impacted. The RBI’s concerns of asset-liability mismatch in the lending of NBFCs doesn’t apply to MFIs, since their assets—that is their own lending—is for two years or less,” said Harsh Srivastava, CEO, MFIN. According to recent MFIN data, about 95 per cent of funding of small NBFC-MFIs and 75 per cent for mid-sized NBFC MFIs, is from financial institutions other than banks. On the other hand, about 63 per cent of funding for large NBFC MFIs is from banks.  As on 30th June 2018, there were 19 large NBFC — MFIs; 16 medium 13 small NBFC MFIs. As on 30th June 2018, the total loan outstanding of the MFI sector was  Rs 1,480 billion, with the share of NBFC MFIs being  Rs 518 billion.

Deepening Crisis

• IL&FS defaults squeezes financing in market

• MFIs brace for rise in cost of money

• Have to rework liquidity management

• Boardbase sources of funds

• Temper growth targets for medium term