MFI funding hit by AP Act, RBI norms: Report

Written by fe Bureau | Chennai | Updated: Mar 31 2012, 06:30am hrs
Following Andhra Pradesh Act and the RBIs capital adequacy requirements, many micro finance institutions (MFIs) are on the brink of failure, which will negatively impact the financial inclusion agenda for India, said a report by Legatum Ventures, a private investment group.

The report titled 'Indian microfinance: looking beyond the AP Act and its devastating impact on the poor' said that lending to MFIs has dried up, eliminating access to credit for the poor both now and into the future. Indian banks have abandoned private sector lenders to the poor, offering them credit at unsustainable rates and on onerous terms. Prior to the AP Act, the average tenure for bank loans to MFIs was 37 months, with a 12.4% interest rate25. Since the AP Act, banks are protecting themselves by generally offering shorter term, 24 month loans with interest rates as high as 15%26, it said.

Across India it is now harder for MFIs to secure the funds to meet the demand for financial services to the poor. And when MFIs do take these loans, they must pass on the costs to the borrowers. In effect, the AP Act has driven up the real cost that the poor will need to pay for their loans, for a long time to come, by having introduced defaults, uncertainty and increased cost and risk for financiers.

Bank lending to MFIs in FY 2012 (until December) was limited to 12 MFIs, of which SKS was the only MFI with significant exposure to AP that received funding all other MFIs with significant AP loan portfolios have so far been denied funds. Lending to the sector in FY 2012 has been a mere R4,173 crore, which is less than a third of disbursements to the industry in FY 2011. As the fiscal year end approaches at the end of March 2012, this may increase marginally as banks look to fill their priority sector lending requirements, the report said.

Although the largest private sector lenders, ICICI Bank and HDFC Bank, have not re-started lending to MFIs, a number of public sector banks, most notably SIDBI, have begun to disburse small amounts. These amounts, however, are a drop in the ocean compared to the demand for credit by the poor and the flow of funds to private sector MFIs prior to the AP Act. MFIs with AP exposure are urgently in need of financing for their non-AP portfolios if they are to survive the current crisis.

According to Legatum Ventures, the blockage of funds to MFIs is hampering the governments financial inclusion agenda, and will likely contribute to the failure of private sector MFIs.