MFIN Seeks Credit Guarantee for Microfinance
The Microfinance Industry Network (MFIN) has requested that the government provide credit guarantee support to assure banks of their safety in lending to the sector.
According to the self-regulatory organization's (SRO) chief executive, Alok Misra, a "leap of faith" is necessary to secure funding for MFIs and initiate a positive cycle that will stimulate economic activity.
Misra noted that non-banking financial company microfinance institutions (NBFC-MFIs) rely on bank loans for nearly two-thirds of their funding, and expressed that banks have been hesitant to lend to this sector, which has caused significant liquidity challenges.
In mid-July, MFIN reached out to the government with a proposal for a credit guarantee scheme valued between Rs 15,000 to 20,000 crore for the sector. This scheme would allow the government to guarantee up to 75 percent of an MFI's loans from banks, thereby encouraging banks to lend, he explained.
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He mentioned a similar initiative that was successfully executed during the COVID-19 pandemic in 2021, highlighting that the Rs 7,500 crore allocated by the government went unused as all MFIs met their repayment obligations.
Misra indicated that MFIs are scheduled to meet with senior Finance Ministry officials next week to discuss these proposals, followed by meetings with bank leaders.
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Additionally, he pointed out that the refinancing from state-owned institutions like Sidbi and Nabard has been relatively low recently and called for assistance in that area.
He stated that there are no issues in Tamil Nadu, despite the state passing an ordinance that raised concerns regarding its impact on the sector, and mentioned that in Karnataka, which took similar action, there has been a positive trend with overdue loans for up to 180 days decreasing to 6.08 percent from nine percent over the past six months.
Addressing the Reserve Bank of India's accusation regarding the sector's engagement in exorbitant interest rates for borrowers, Misra clarified that the weighted average lending rate stood at 23.66 percent in June and has remained stable in recent quarters.
He emphasized that occasionally, statements are made that do not align with the actual data, asserting that no MFI, even those on the fringe, charges an interest rate exceeding 27.5 percent.
Misra noted that the return on equity in the sector is a modest 10 percent due to the interest rates applied, which may dissuade investors from entering the market. He welcomed the investment confidence shown by some who have injected new equity into the sector.
He asserted that the challenges encountered by the sector are neither cyclical nor structural, emphasizing its critical role in overall economic activity, contributing more than 2.5 percent to the gross value added.
Lastly, he downplayed concerns over the impending state elections in Bihar, a key state for the industry, and their potential effects on the sector.