India: MFIs Face Challenge of Global Meltdown

Oct 2008
Hyderabad, India, October, 29 2008 - Financing for the poor is getting more frugal now with microfinance institutions facing the heat of the global financial meltdown. There has been a virtual halt in fresh disbursements to MFIs by banks and financial institutions coupled with over 200 basis points hike in interest rate. It does not end at credit squeeze alone. Banks are also asking for personal guarantees of directors of MFIs.

A few banks have hiked the security margins from 10% to 25% over the loan amount sanctioned to banks. As a result, MFIs are unable to use even sanctioned funds. According to sector trackers, MFI sector may have trouble raising loans till January as banks will try to complete their priority sector lending targets more aggressively only in the last quarter of the fiscal.

The total disbursements to MFIs aggregate to around Rs 1 lakh crore and south India is the hub of microfinance activity in the country. For Bangalore-based Ujjivan, a microfinance entity that lends to the urban poor, raising the fourth round of equity (nearly Rs 90 crore) has perhaps come at a very opportune time. So, when the microloan industry is facing a credit squeeze, Ujjivan has addressed some of the capital raising woes with the equity round.

The MFI has received some advance subscription from its existing shareholders — Unitus , Bellwether, Micheal and Susan Dell Foundation. “It is just a coincidence,” says Ujjivan founder Samit Ghosh. “Bank lending rates have jumped by 400-500 basis points. We have to tighten our belts considerably. We are depending on internal cash flows, repayments and fee income to keep interest rates stable,” he adds.

The situation is similar in MFI hub, Andhra Pradesh. Hyderabadbased Share Microfin mananging director M Udaia Kumar says, “the situation is alarming in India for MFIs since it affects the credibility of the organisation. Further, it strains the relationship of trust built with clients and may result in clients not making timely repayments .” Adds Padmaja Reddy, managing director, Spandana. “Banks are tightening credit lines. Current sanctions are available but disbursements are getting delayed. Interest rates have predominantly gone up by over 200 basis points. But we have been able to absorb the rise in interest cost as our operating costs are low,” she said.

Spandana has a diversified debt portfolio that could help cushion the impact of higher interest costs. “We are preparing to diversify our debt raising capabilities, through bonds issuance and securitisation through capital market and structured debt funding,” said Shiv Narain, chief financial officer, Spandana. Bankers, notably the PSU lot, that ET spoke to, however, deny a slowdown in lending to MFIs and self help groups.

“One doesn’t see a reason for reduction in the quantum of lending to these institutions. The rate at which we lend to MFIs is dependent on a number of factors including the rating of such agencies.

These rates may have marginally gone up due to the prevailing liquidity situations,” said one banker. Also, given the near 100% repayment of such loanees, banks say, lending to such entities like MFIs makes imminent commercial sense. “PSU banks have clearly mandated social banking goals and we have to achieve it,” said another. With the first tranche of the farm loan waiver/agri debt relief scheme being disbursed to banks, they opine that the liquidity situation would ease up giving them additional room for onward lending to MFIs.

Most banks lend to MFIs/SHGs in the range of 8.5% to 12.5-13 %. There have been some instances where well-run MFIs have secured funding at the lower end of say 8.5% to 9% also.

The core demand for MFIs, like many others, is more credit from banks at affordable interest rates. Share Micro Fin, on its part, has not passed on the higher interest cost burden to its borrowers. “We have asked our clients to use the loan funds effectively to tide over the global financial crisis,” said Udai Kumar. Disbursements nearly doubled to Rs 854 crore during April to September this year compared to Rs 441 crore in the same period, last year.

SKS Micro finance too is adopting a waitand-watch approach. “We have not yet passed on the hike in interest rates to our members. They continue to pay earlier rates” , said MR Rao, CEO, SKS. But the story is not the same for all MFIs. “We have passed on the increase (in interest rate) to customers availing disbursements now in case of certain loan products,” said NV Ramana, chief financial and technical officer , Basix.

The MFI charges interest ranging from 15-24 %, depending on the loan product. Basix disbursed loans aggregating to Rs 295 crore during April to September this fiscal compared to Rs 132 crore in the same period last fiscal. A silver lining is equity investors are still looking at pumping funds into MFIs. This would help them strengthen their networth. “Equity investors are showing interest in MFIs as valuations are attractive. But this could be impacted over a period of time,” adds Udaia Kumar.


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