Asnima Bibi, 35, runs a cosmetics shop at a downtown slum in Kolkata. For last six months she has been eagerly awaiting a loan from a microfinance institution (MFI), to stock up for the ensuing festive season.

However, with bank funding to MFIs coming to a virtual halt, Asnima may have to wait longer to get the desired finance. Faced with a severe credit crunch, MFIs are left with little choice but to shrink their portfolio, and put a pause on new customer acquisitions.

The sector, which grew by about 76 per cent in 2009-10, saw growth slipping to below 10 per cent in 2010-11. Given the funding and regulatory issues, the growth is likely to remain flat or could even be negative this year, said Mr Alok Prasad, Chief Executive Officer, MFIN (Micro Finance Institutions Network).

“Though bank funding to the MFIs is better than what it was three months ago, it is yet to gather full steam,” he told Business Line .

MFIs across the country point out that the situation is unlikely to improve till the fiscal-end. And most MFIs will be forced to scale down their customers' credit-limit during the peak demand period of the festive season between August and December.

“Lack of credit flow coupled with inflation will be a dampener this festive season,” said Mr Vivekanand N. Salimath, Chairman, IDF Financial Services.

The delay in bank funding could weaken the balance-sheets of MFIs and this could lead to defaults, said Mr Shubhankar Sengupta, Managing Director, Arohan Financial Services. “Between April and July, we have disbursed just about Rs 25 crore, while our capacity is to disburse about Rs 30 crore every month,” he said.

“Though banks do express their willingness to lend to MFIs, sanctions don't get converted into actual disbursements. So MFIs are forced to prioritise client requirements, and hence there have not been much of new client acquisitions. Even for existing clients, only those who are in dire need of funds get credit,” said Mr Rahul Kumar, CFO, Mimoza Enterprises Finance.

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