A “satisfactory relationship” for at least 3 years with a commercial bank, authorised to deal in foreign exchange, will be required.
The Reserve Bank on Monday allowed microfinance institutions (MFIs) to raise up to $10 million through external commercial borrowings.
Non-government organisations engaged in microfinance activities can avail of external commercial borrowings (ECB) up to $10 million or equivalent a financial year under the automatic route, from $5 million or equivalent earlier, RBI said.
Industry players said the move reflects the return of regulatory confidence to the sector.
The Reserve Bank of India (RBI) said micro lenders can raise up to $10 million in a financial year through ECBs under the automatic route.
MFIs said they will be looking to raise funds through this route as cost of funds in the domestic market has become expensive and most banks in India are still wary of lending to the sector.
External commercial borrowings are used by companies to get loans from abroad.
The microfinance institutions looking to raise funds through ECBs must have a "satisfactory relationship" for at least three years with a scheduled commercial bank authorised to deal in foreign exchange. They will also need a certificate of due diligence on 'fit and proper' status from the authorised dealer bank.
"This certainly opens up a new window because banks are still not coming forward to lend money to microfinance institutions. For institutions like us, $10 million will be sufficient. We will explore options to raise funds through this route," Kishore Kumar Puli, chief executive of Trident Microfin, a microfinance institution in Andhra Pradesh, said.
RBI said micro lenders that are classified as non-banking finance company microfinance institution will be permitted to avail ECBs from multilateral institutions such as India Infrastructure Finance Company, Asian Development Bank, regional financial institutions, international banks, foreign equity holders and overseas organisations.
The central bank said that authorised dealers who will aid microfinance companies in raising funds through ECBs must ensure that the proceeds are utilised for lending to self-help groups or micro credit or genuine microfinance activities including capacity building.
"It is clearly a positive step. This provides us with another funding option. Earlier many global microfinance funds, specialised microfinance investment vehicles that were looking to invest in Indian microfinance sector could not do so because of policy restrain. We will start working on this immediately and explore scope of raising funds through this route," S Dilliraj, chief financial officer of SKS Microfinance, said.
"It also shows that RBI has more confidence in this sector. They are looking at offering dispensations after putting in a regulatory framework," he added.
Some micro-lenders, however, did not see this move meeting the funding needs of the sector.
"It is not an earth-shattering development that will stimulate financing of Indian microfinance companies. Given the current global environment, we have to see at what rates funds are available," said a senior official of a microfinance company in Andhra Pradesh.
Micro lenders also said not many foreign investors will be keen to offer funds to Indian microfinance companies at a time when the sector is going through a crisis and many firms have opted to restructure their debts.
