The cash-starved microfinance sector will be severely hit by if the new draft guidelines issued by the Reserve Bank of India on securitisation of loan portfolios are implemented, according to the microfinance industry.
Last week, the RBI released a revised draft of the securitisation guidelines.
In the case of microfinance loans, the minimum holding period of the loan before securitisation will be six months from the due date of the first installment.
Securitisation is the process of converting existing assets, or future cash flows, into marketable securities.
The microfinance industry has been in the practice of assigning repayments from borrowers to investors in securities.
Currently, RBI allows securitisation of loans held by the NBFCS after three months from the first installment.
A typical MFI loan spreads across one year, with a monthly or weekly repayment cycle.
The MFIN board that is meeting on October 10 will discuss the impact of the new guidelines and will give representation to the RBI to reconsider its decision, said Vijay Mahajan, the President of the Microfinance Institutions Network (MFIN), a self-regulating body of MFIs.
"From the point of view of risk management, it definitely is okay. However, the RBI has to balance between some additional liquidity facilities for MFIs at this stage. As long as the quality of the asset is good, three months or six months does not make that much of difference," Mahajan told PTI.
"We will be requesting the RBI, for the transitional period, till the banking sector lending to MFIs is restored to normalcy -- at least one to two years -- they should consider three months' tenure for a year-long loan and six months for a longer tenure," sad Padmaja Reddy, the promoter of Spandana Sphoorty Financial.
In this regard, Reddy pointed out that the microfinance sector has been feeling the heat from banks and other financial institutions after the Andhra Pradesh government introduced a Microfinance Act regulating the sector last year.
Andhra Pradesh accounted for almost 30% of the microfinance lending in the country before the new Microfinance Act was implemented in the state.
"The new guidelines of the RBI would not really help the MFI sector, it would rather curb the MFIs in terms of raising loans. Post-AP crisis, our [microfinance companies] rating has been deteriorated. We cannot even look at even other instruments, such as commercial paper and all," Reddy said.
Mahajan said one of the RBI's responsibilities is to ensure that enough credit is available to MFIs at a lower level of interest.
"There will be certainly some impact on the MFI industry. Only tail of the loan can be securitised. There is refinancing possible with a constraint that you will have to hold it at least for six months," Nidhi Bothra, the Vice-President of securitisation consultant Vinod Kothari, said on the new guidellines.