1. Demonetisation: Implication of repayment relief splits microfinance industry

Demonetisation: Implication of repayment relief splits microfinance industry

The country's microfinance institutions (MFIs), which are severely hit by the ongoing demonetisation process of high value notes, on Monday expressed a divided opinion on the implications of additional 60 days repayment...

By: | Kolkata | Published: November 21, 2016 9:58 PM
According to the RBI notification, term loans, where the original sanctioned amount is Rs. 1 crore or less, on the books of any bank or any NBFC, including NBFC (MFI), will be eligible for the extended repayment period. (Reuters) According to the RBI notification, term loans, where the original sanctioned amount is Rs. 1 crore or less, on the books of any bank or any NBFC, including NBFC (MFI), will be eligible for the extended repayment period. (Reuters)

The country’s microfinance institutions (MFIs), which are severely hit by the ongoing demonetisation process of high value notes, on Monday expressed a divided opinion on the implications of additional 60 days repayment relief on loan dues extended by the Reserve Bank of India to them and their borrowers.

Following representations from the industry bodies suggesting that small borrowers may need some more time to repay their loan dues on the back of withdrawal of the legal tender status of Rs. 500 and Rs. 1,000 notes, the RBI provided some relief to small borrowers and firms, including NBFC-MFIs.

According to the RBI notification, term loans, where the original sanctioned amount is Rs. 1 crore or less, on the books of any bank or any NBFC, including NBFC (MFI), will be eligible for the extended repayment period. Loans sanctioned by banks to NBFC (MFI), NBFCs, Housing Finance Companies, and PACs and by State Cooperative Banks to DCCBs are also eligible for the relaxation.

Commenting on the central bank’s measure, Manoj Kumar Nambiar, managing director of Arohan Financial Services, said the move was a welcome step which will help the MFIs, while Village Financial Services managing director and CEO Kuldip Maity, and Ujjivan Financial Services CEO & MD Samit Ghosh said it will not be helpful for the industry as the move can be misused.

“This move will have both back-end and front-end implications. From a cash-flow perspective it is a good step. Now, I can give ten additional days to my borrowers to repay loan dues. It will not hurt my accounts and credit ratings as I also have additional time to repay to the banks,” Nambiar told FE.

Maity, however, said the central bank’s move can be misused by a portion of small borrowers and that may in turn break the repayment chain. “For us, currently 60-70% of borrowers are making repayments as cash flow in the system are improving. But after this notification, some portion of them may stop repayment. Then it will hurt loan disbursement. In the meantime, banks may not give fresh loans to the MFIs.”

“It will be a wrong interpretation of the RBI’s notification if borrowers, who have ability to make payment, defer repayments. The central bank has actually extended the provisioning norms for the substandard assets for the lenders on the back of demonetisation. This is not going to help us (MFIs). This is going to help banks,” Ghosh added.

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