MFIs’ default may hurt banking sector
Oct. 21: The inability of microfinance companies to recover dues from their customers and drying up of further borrowing avenues could potentially have a cascading effect on the banking industry, which is the major source of funding for the sector.
The state government’s recent ordinance has banned micro finance companies from lending or recovering their dues from their customers until they are registered with District Rural Development Authority (DRDA) in each district. With no clarity on the procedures to be followed for the registration, MFIs claim that they were not able to get registered and hence bringing the entire microfinance credit cycle has come to a grinding halt.
Some of the MFIs, who approached DRDA complained about the sluggish process, which would require 45-60 days for registration, potentially paralysing the industry. This, experts argue, could spread contagion to the banking industry, which finances 90 per cent of the micro finance sector’s funding requirement.
The total outstanding that the micro finance sector owes to banks is Rs 30,000 crore. Of this, the poor in Andhra Pradesh have borrowed around rs 9,000 crore, whose recovery has been stalled by the ordinance. On an average, major MFIs pay and borrow Rs 675 crore from the banking sector every week.
Any default in payments in the state, experts said, would affect seriously affect the ability of micro finance companies to service their bank loans, potentially increasing the bad debts of the banking sector. Several major MFIs are already reportedly finding it difficult to source funds for the service their bank loans.
According to industry data, private banks are more vulnerable to any default by MFIs as they have maximum exposure to the sector followed by Sidbi and public sector banks. Asked if the government’s directive to public sector banks to takeover loans from MFIs would save the sector, an industry leader said banks do not have such infrastructure to maintain such portfolio. “The micro finance companies have around 20,000 employees in the state and it would be near impossible for banks lend the poor with such a workforce, which is just a fraction of that of MFIs,” he said.
Apart from infrastructural problems, Reserve Bank of India’s KYC norms could also prevent banks from lending to micro finance customers, who mostly do not have even a proper address or income proof. The micro finance industry had in April approached the rural development poverty alleviation authority to appoint a task force to study and understand the problems of micro financing and also set up a credit bureau. The micro finance institution network has already invested Rs 5 crore in the Credit Bureau.
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