MFIN Seeks Credit Guarantee Support from Govt to Boost Bank Lending to Sector

Microfinance Industry Network (MFIN) has sought credit guarantee support from the government to ensure that banks get comfort in lending to the sector.

There is a need for a "leap of faith", which will ensure funding to MFIs and start a virtuous cycle that will help economic activity as well, the self-regulatory organisation's (SRO) chief executive Alok Misra told reporters here.

Misra said NBFC-MFIs are dependent on bank lending for almost two-thirds of their resources, and added that banks are showing some reluctance to lend to the sector, leading to "severe liquidity constraints".

"Once (bank) funding starts, disbursements (by MFIs) will improve," Misra said, pointing out that the gross loan portfolio for all microlenders has declined by nearly 17% in the three months to June to ₹3.53 lakh crore, and the number of borrowers has fallen 6% to 7.5 crore.

MFIN has written to the government in mid-July seeking a ₹15-20,000 crore credit guarantee scheme for the sector, where the government guarantees up to 75% of an MFI's borrowings from banks and the banks get the comfort to lend, he said.

Pointing out that a similar scheme was implemented successfully during the Covid period in 2021, he said the ₹7,500 crore fund for the purpose by the government was not utilised as all the MFIs paid their dues.

Misra said that MFIs will be meeting top Finance Ministry officials next week to discuss the proposals and follow up by meeting bank chiefs.

He also said that the refinance by state-owned Sidbi and Nabard has not been very high in the sector lately and appealed for help on that.

Acknowledging that the MFI sector has had a challenging time for the last year, Misra said there are improvements in the sector lately, with the gross non-performing assets ratio of loans overdue for over 90 days reducing to 3.2% in June from 3.5% in March this year.

The collection efficiencies are also improving, he said, pointing out that MFIs' collections have gone up to over 98% now from 95% in January this year.

He said there are no issues in Tamil Nadu, despite the state moving an ordinance, which was feared to impact the sector, and added that in the case of Karnataka that undertook a similar move, there is an improvement, with the proportion of loans overdue for up to 180 days, declining to 6.08% from 9% six months ago.

Denying the RBI's charge of the sector indulging in usurious interest rates from borrowers, Misra said the weighted average lending rate was 23.66% in June and has been "range-bound" for the last few quarters.

Stating that sometimes statements are made, which are not in line with the facts, Misra claimed that even the outlier MFI will not charge an interest rate of over 27.5%.

The return on equity is a low 10% because of the interest rates charged, due to which investors can become wary of entering the sector, he said, welcoming the faith shown by some investors by putting fresh equity in the sector.

The problems faced by the sector are neither cyclical nor structural, he said, stressing that the sector plays a very important role in the overall economic activity and contributes upwards of 2.5% to the gross value added.

He dismissed concerns about the upcoming state elections in Bihar, one of the biggest states for the industry, that may affect the industry in any way.