The Microfinance Institutions Network (MFIN), which represents over 44 micro finance institutions across the country, is planning to put in a corpus of Rs 1,000 crore as emergency liquidity fund to help member companies bail themselves out of the current liquidity crisis in the wake of lukewarm response from banks and financial institutions.

The association is currently in talks with Small Industries Development Bank of India (Sidbi), ICICI Bank, State Bank of India (SBI) and few other banks for creating the ?emergency fund?. MFIN hopes to raise this corpus by next month. According to Alok Prasad, chief executive, MFIN, loan recovery in Andhra Pradesh has come to a standstill. ?We are looking at an emergency fund to help smaller companies as a bail-out exercise,? he said.

While Rakesh Rewari, acting CMD, Sidbi, refused to divulge details on the issue, Ramnath Pradeep, CMD, Corporation Bank, told FE that the bank is open to financing the micro finance sector, if they are ready to reduce their rate of interest. ?They should also ensure that no coercive measures are used by them while recovering the loans,? he said.

M Dholakia, deputy general manager, SBI, has confirmed that MFIs have approached the bank in 2-3 locations for an average loan size of Rs 5 crore each.

He said, ?We have already told them about terms and conditions relating to lowering interest rates and complying with corporate governance norms. We now want to know how these MFIs are obeying our terms and condition. Also, we have advised our sanctioning authorities to keep in mind the terms and conditions before finalising the loans. SBI, which has total exposure of Rs 853 crore to MFIs, has not revised its plans to sanction Rs 200-300 crore loan to the sector for this fiscal.?

MFIN is now in the process of setting up an office of the Ombudsman. ?We are working on appointing an eminent personality group to look into the recent suicide cases in Andhra Pradesh besides setting up a helpline,? he said. Incidentally, MFIN has filed a expeditious petition in the Andhra Pradesh High Court on Tuesday to speed up the trial.

Furthermore, MFIN will soon be knocking the Reserve Bank of India doors for fresh regulations as well. The association is also seeking intervention of the finance ministry to resolve the current issue in Andhra Pradesh, which has led to numerous concerns in the banking and investment circles.

The micro lenders in Andhra Pradesh have been hit hard due to the Andhra Pradesh Microfinance Institutions (Regulation of Money lending) Ordinance, 2010, which was passed on October 15. Over Rs 9,000 crore is at risk due to the cumbersome registration processes owing to the ordinance. In an earlier interaction, Vijay Mahajan, president, MFIN, had said that about Rs 200 crore of collection per week has been affected by the ordinance as it specifies that every MFI has to be registered in all the 23 districts in the state for the collection procedures. MFIs depend 80% on banks and 20% on equity.

?Banks are not renewing their limits to micro finance agencies. There is some amount of restraint in lending to these institutions, particularly those based in Andhra Pradesh,? said the rural banking head of a private sector bank.

?MFIN has approached lenders with large exposure to Andhra Pradesh for emergency funding. Registered MFIs have begun collections. But this is only at about 45%. Earlier, MFIs saw 99% collections, hence banks are wary of lending,? he added.

Vijay Mahajan had earlier said that AP Ordinance was ?anti-people?. ?It will drive millions of poor households in Andhra Pradesh back into clutches of money lenders. In fact, this ordinance is a gift of Rs 2,400 crore per annum to money lenders. That will be the extra interest the poor in the state will have to pay,? he said.

The possible solution, according to Mahajan, is that there has to be a comprehensive regulator which goes beyond prudential regulation and covers aspects such as prevention of overlending, excessive profit and coercive recoveries, and above all, grievance redressal of clients.

The micro finance sector needs Rs 20,000 crore to reach 10 crore poor people living in the country. Keeping in view the huge requirement, the sector has kept all options of fund raising open with it which may include private equity and IPO. The MFI sector has the potential to appoint 2.5 lakh people more after already having provided employment opportunities to two lakh people.

Mahajan had demanded that MFIs must be permitted to act as business correspondent (BC) for banks so as to bring down their interest rates while lending to the poor. Currently, MFIs are charging interest rates of over 24% per annum. But, if the MFIs are allowed to work as BC for banks, which are already in a rush to appoint BCs to achieve their financial inclusion targets, then the interest rates being charged by MFIs will come down to 18-21%, claimed Mahajan.

According to R Subramanyam, principal secretary, rural development department, there are variations in the interest collected by the MFIs and hence no uniformity. Meanwhile, MFIs are mulling to redesign insurance schemes and educate borrowers about costs and benefits and bring in an uniformity in interest rates. As per the ordinance, MFIs have to switch to monthly recovery system. Alok Prasad said MFIN has invested over Rs 3 crore in taking membership of two RBI approved Credit Bureaus and over 25 million records have been uploaded.

By December 2010, all micro-loans will be given after credit bureau clearance. This will greatly reduce any possibility of multiple lending and a full adherence to the MFIN Code of Conduct.