Microfinance institutions may continue to face credit crunch

Microfinance institutions are likely to continue facing credit crunch as banks are still hesitant to lend to them.

Banks had stopped lending to microfinance institutions across the country after the Andhra Pradesh Government put in place a regulation in October last year.

Even a year after the crisis happened, the ground realities make banks adopt a cautious approach, say bankers.

“ Banks' lending to microfinance sector is not back to normal yet,'' Mr Sushil Munhot, Chairman and Managing Director, Small Industries Development Bank of India, told Business Line on the sidelines of Bancon 2011 held in Chennai on Sunday.

In view of the prevailing uncertainty in the microfinance sector due to the Andhra Pradesh MFI Act, banks increasingly prefer direct lending to Self-Help Groups to meet the priority sector norms.

“While MFIs per se are not a taboo, our focus now is on lending to self-help groups,'' Mr N. Seshadri, Executive Director of Bank of India, said.

Indian Overseas Bank has also been treading a similar path. “Up to November, we have provided loans to 12,000 self-help groups,'' its Chairman and Managing Director, Mr M. Narendra said.

State Bank of Hyderabad too is cautious and opting for direct financing of self-help groups, Mr M. Bhagavantha Rao, Managing Director, said.

According to a senior official of Indian Banks' Association, corporate debt restructuring of loans of major microfinance institutions early this year made banks aware of the ‘hollowness' in the asset quality.

It is important for banks to avoid a repeat of this situation and, hence, there is caution, he added.

Mr D. Sarkar, Executive Director of Allahabad Bank, said tight due-diligence should be applied before sanctioning loans to MFIs, like any other loans.

But, this is the crux of the issue. If financial inclusion commitments are detached from loans to microfinance institutions, many of the loan requests cannot pass the litmus test, it is said.

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