Kolkata, West Bengala, November, 24 2010 - Facing a shortage of lendable resources, microfinance institutions in West Bengal have huddled together and are desperately trying to convince their bankers for loans so that they can resume their normal operations. They are forced to cut down loan disbursement by 40-50%.

Banks have stopped lending to MFIs in general, fearing non-payment of their dues. This was triggered by a crisis in Andhra Pradesh, where poor borrowers of MFIs started defaulting wilfully. The decision of banks to avoid further exposure in the MFI sector has a trickledown effect in the state too.

All micro lenders are gasping for funds to meet their credit demand from poor borrowers, which has forced them to reduce the scale of business. MFIs here are trying to convince that they are different from their counterparts in Andhra Pradesh and follow a code of conduct diligently. The code, prepared by their industry body, put certain restrictions on their operations to safeguard the interest of their poor bororwers. MFIs in Bengal are also in talks with development institutions like Sidbi and Nabard to find a way out from this stiff liquidity crisis, which is going out of their hands by the day.

“Nearly 80% of our funds come from banks. As banks stopped lending to us, we had no option but to curtail our lending growth," said Shubhankar Sengupta, managing director of Arohan, a Kolkata-based entity.

MFIs take bank loans and on-lend to micro borrowers. The average size of micro-loan in West Bengal is around Rs 5,000.

Bandhan Financial Services , the country’s fourth-largest MFI by assets, said it will not lend more than Rs 350 crore in November, against their usual target of Rs 500 crore a month. Village Financial Services has halved its monthly loan disbursement to around Rs 15 crore from Rs 30 crore even a month ago.

These lenders suspect that if they fail to meet a growing demand for micro loans, their borrowers would stop repayment to maintain the flow of the working capital.

“If the situation continues like this, the entire MFI system will collapse,” said Kuldip Maity, MD and CEO of Village Financial Services, West Bengal’s second-largest MFI by assets.