Commercial banks are losing their confidence in lending to microfinance institutions (MFIs), according to a National Bank for Agriculture and Rural Development study.

This is evident from the fact that fresh lending to MFIs by banks during 2011-12 declined by 38 per cent to Rs 5,205 crore against Rs 8,449 crore last year.

In FY2012, there was a marginal decline in the number of MFIs getting fresh loans from banks at 465 (471 in the previous year). Further, the loan outstanding with MFIs has also come down by almost 17 per cent to Rs 11,450 crore (Rs 13,731 crore in the year-ago period).

Fresh loans as a percentage of loans outstanding have come down to 45.5 per cent in FY2012 from 61.5 per cent in FY2011.

Nabard cautioned that if the above trend continues, the sector is likely to face serious resource crunch and could affect its outreach plans in the near future.

MFIs are in the nature of Association of Persons or Trust under the Indian Trust Act 1920 or Company under Indian Companies Act, 1956.

Nabard observed that of late the functioning of these institutions (mostly for-profit non-banking finance companies) were being subjected to closer public scrutiny on account of alleged unethical business and questionable recovery practices.

The unethical practices of MFIs led the Andhra Pradesh Government to pass a law severely restricting their lending operations and recovery mechanisms. As a result, the lending operations of these institutions virtually came to a halt not only in Andhra Pradesh where most of their lending operations were concentrated but in other areas as well even as loan recovery nose-dived.

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