Microfinance NGOs allowed to raise up to $5m ECBs

The Reserve Bank of India (RBI) today permitted non government organisations (NGOs) engaged in micro finance activities to raise external commercial borrowing up to $5 million during a financial year.

Finance minister P Chidambaram in his annual budget had urged the central bank to open a window to enable qualified NGOs engaged in micro-finance activities to use the ECB window.

"This is a positive development and we could see an inflow of around $ 20 million through the ECB window," said banking sources.

Micro finance institutions (MFIs) like Basix's, Spandhana, Sewa, Swayam Krishi Sangam are likely to be among the first to raise funds through the external commercial borrowings (ECBs) route, he added.

Uday Kumar managing director Share MicroFin had earlier told Business Standard that, "the opening up of the ECB window will enable Share MicroFin bring down its cost of funds."

Domestically we borrow funds from banking institutions at around 12 per cent. Access to the ECB window will enable the institution to borrow funds at around 6 to 7 per cent said Uday Kumar.

According to the RBI directive NGOs engaged in micro finance activities having satisfactory borrowing relationship of three years with a bank and 'fit and proper' board or management committee would be eligible to avail ECB.

MFIs could avail ECB's from international banks, multilateral financial institutions and export credit agencies. In addition to this overseas organisations and individuals complying with Know your Customer (KYC) guidelines and anti-money laundering safeguards could also lend ECB to MFIs, said the RBI.

Silicon Valley big gun Vinod Khosla, leading venture capitalist partner in venture fund firm Kleiner Perkins Caufield & Byers and co founder Sun Microsystems has been planning investment in micro finance opportunities in India and Africa.

According to reports Khosla is planning to deploy around $ 5 million in this sector. Khosla is looking to make his maiden investment of around $ 2 million in micro-finance by taking equity stake of 20 per cent in a Hyderabad-based micro-finance institution, Share Micro Finance Ltd.

To ensure appropriate utilisation of funds the RBI has further added that authorised dealer (AD) would have to ensure that the ECB proceeds are utilised for lending to self-help groups or for micro-credit or for bonafide micro finance activity including capacity building. ECB funds should be routed through normal banking channel.