MFIs may find the going tough as fund tap runs dry

Microfinance institutions could soon find it difficult to service their bank borrowings, with the threat of borrowers defaulting on repayments and banks refusing to lend them.

What is becoming a concern for MFIs is meeting credit requirements of their clients, operational costs, and also keeping their organisations afloat during these times when funding is proving to be a difficult task.

MFIs are managing to stay afloat because of the inflows through recoveries from their clients.

“As long as we can manage the field and get our recoveries, we can repay. But, MFIs cannot expect 100 per cent recoveries without further bank disbursements, because clients might want to conserve money,” Mr Suresh Krishna, Managing Director, Grameen Koota, a Bangalore-based MFI, told Business Line .

Despite having no exposure in Andhra Pradesh, MFIs such as Grameen Koota continue to have problems raising funds, especially from banks.

“We have downsized our operations, introduced cost-cutting measures, etc. Without fresh funds, it would be difficult for many of us to sustain for a long time. If this situation persists, there could be defaults by a few MFIs towards repayment of their loans (to banks),” said a top official of an MFI.

Shrinking credit portfolio and no fund inflow into the system despite continued outflow is a cause for concern for MFIs. “We mobilised about Rs 140 crore in the beginning of this year through alternative channels, like non-convertible debentures, securitisation and selling portfolio to banks. But, we have repaid Rs 250 crore to banks during the third and fourth quarters of the last fiscal,” he pointed out.

Despite such serious concerns, most MFIs still see a glimmer of hope as some banks have started releasing funds.

Echoing Mr Krishna's sentiments, Dr Rahul Kumar, CFO, Mimoza Enterprises Finance, a New Delhi-based MFI, said that repayment of loans by MFIs will not be a problem as long as there is no problem from the client side. In the near-term, MFIs will meet their obligations, he said. “However, if funding continues to be choked for the next six months, then there could be issues.”

Though Mr Krishna hoped that such a situation will not arise as banks have started releasing funds slowly, “ the quantum of funding and scale of growth will come down”, he said, adding that growth rates are very slow now. “Controlled growth rate will be the new norm.”

Two months ago, banks, under the aegis of the Indian Banks' Association, had reached a unanimous decision that there was an urgent need to restructure the accounts of MFIs having exposure in Andhra Pradesh. The fear then was that most of the Andhra Pradesh-based MFIs may fail to meet repayment obligations to banks or financial institutions after February 2011 as collection had dropped to 20 per cent in the State. The banking sector has stopped fresh finance to this sector.

Seven large Andhra-Pradesh based MFIs have been referred to the Corporate Debt Restructuring cell. The RBI has given banks time up to June 6, to restructure their loans.

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