MFIs request RBI for emergency credit line as collections take a hit

Seek up to 25% of their outstanding with lending banks, which would help them mobilise Rs 15,000 cr

Microfinance institutions, most of which are feeling the heat as the lockdowns imposed in several states have impacted their collections, appealed to Reserve Bank of India (RBI) for an emergency credit line to tide over the crisis situation.

In a letter to the regulator, microlending industry body Sa-dhan sought an emergency credit line of up to 25 per cent of MFIs’ outstanding with the lending banks, stating this would help microlenders to mobilise Rs 15,000 crore. Such a move will facilitate the immediate flow of funds to MFIs from the commercial banks.  

“Due to increase in lockdowns and impact on incomes of clients, the repayments of MFIs are being affected adversely, which leads to severe liquidity and sustainability issues for MFIs if not supported with sufficient funding and asset classification support from Banks and DFIs,” Sa-dhan said.

Speaking to Business Standard, K Paul Thomas, chairman Sa-dhan, and MD & CEO of ESAF Small Finance Bank said, “Collections have been impacted due to lockdown. States that are impacted are Kerala, Karnataka, Tamil Nadu due to lockdown.”

“Sa-dhan has requested Rs 15,000 crore refinance from development finance institutions like Nabard and SIDBI to be earmarked for MFI, particularly for smaller MFI of less than Rs 500 crore of asset under management,” he said.

MFIs have argued that lower cost of funds from these DFIs will aid the lenders to protect their margins which is shrinking due to lower credit cost and operation cost.

“We have also requested a credit guarantee scheme for banks and financial institutions for on-lending to the microfinance companies,” Thomas said.

The microlenders’ body also said that banks and DFIs to assess the cash flow situation of MFIs and provide them moratorium or restructuring support for six months to a year. “During the first wave of Covid, only 40 per cent of lenders provided moratoriums to MFIs, due to which many microlenders faced a severe liquidity crunch,” Sa-dhan said.

The MFI body has also requested the central bank to push and closely monitor the lending from banks under on-tap TLTRO (targeted long-term repo operations) scheme.

“If the sector is supported with amount of Rs 25,000 crore under this funding window, it would immensely help MFIs in coping with their liquidity and funding challenges. During TLTRO 2.0 we had observed that even large MFIs with good rating were not able to get any support under the funding window." Sa-dhan said.

A request has also been made to replace the present base rate-linked interest rate cap, possibly with a margin cap-based interest rate with an overall ceiling of 26 per cent or inclusion of base rate of small finance banks in the overall rate calculation.

The industry body said, compared to the first wave, a relatively larger proportion of MFI clients and staff has been infected by the second wave even in rural pockets.

“We expect the economic impact on borrowers to worsen further as the number of States announcing complete lockdowns has been increasing manifold. This may affect the Microfinance clients and the sector adversely, unless adequate and appropriate support systems are provided by the Reserve Bank,” it said.

The letter also says that a few states have not classified microfinance as an essential or allowed service, and this would adversely affect clients, who would be devoid of timely credit support.