India: RBI Relaxes Rules to Ease Liquidity Crunch in MFIs

Jan 2011
Mumbai, India, January, 19 2011 - India's central bank has temporarily relaxed asset classification rules for bank loans to the microfinance sector, a move that it said will allow them to continue lending to the industry. Under the new rules, restructured loans to the microfinance sector, can be classified by banks as standard assets, even though such loans are typically unsecured, the Reserve Bank of India said in a notification on Wednesday.

Indian banks have to adhere to strict guidelines while classifying their loan book and set aside funds as provisions, which vary depending on the health of the asset.

While unsecured loans attract higher provisions, the current change in rules means banks can treat restructured microfinance loans as standard assets, which attract minimum provisioning.

"The fact that the RBI is making an exception on behalf of MFIs and taking special steps to support the industry is a good sign from a direction point of view," Anurag Agarwal, senior vice president at Intellecap, a Hyderabad based consulting firm in the microfinance segment, told Reuters.

The sector has been hit hard ever since a state in southern India, which was the largest market for microfinance in India, implemented strict regulations in response to complaints over high interest rates, aggressive loan recovery practices and overextended borrowers.

The law has effectively shut down microfinance operations in Andhra Pradesh as lenders stopped making fresh loans altogether, constrained by the drying out of funds, and repayments have slowed down to a trickle.

MALEGAM COMMITTEE Commercial banks and other financiers are looking for guidance from a central bank subcommittee, headed by Y.H. Malegam, before extending more credit to microlenders. The report's recommendations are expected toward the end of January.

"This measure initiated by the Reserve Bank is expected to impart some liquidity support by banks to MFIs and facilitate a 'holding on' operation for some time till the Malegam Committee submits its report," the RBI release said.

The new rules would apply to bank loans given to microfinance companies that have been restructured up to March 31, the statement said.

The RBI also said that banks can form consortiums to decide on how to resume lending to microfinance companies.

Some of the microfinance companies with large exposures to Andhra Pradesh, such as SHARE Microfin Ltd, Spandana Sphoorty Financial Limited and Asmitha Microfin Limited, may be forced to shut down if liquidity was not forthcoming, according to a source close to the matter.

"It's a battle for survival at this point. The only thing that might save Spandana or SHARE is that banks have very large exposures - up to 10 billion rupees - so they may not let them fail," the source said.

Shares of India's largest microfinance company SKS Microfinance , which have fallen by more than half since the company went public last August, were up more than 3 percent after the announcement.


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