Microfinance cos may see better fund flow

The budget has proposed to set up a Rs 1 billion equity fund for the microfinance sector, which has witnessed turbulence in the past few months after the southern state of Andhra Pradesh put in place tough regulations.

The India Microfinance Equity Fund will be administered by the Small Industries Development Bank of India (SIDBI). The budget for 2011/12, which was tabled in parliament on Monday, also sought to allocate Rs 50 billion to SIDBI to refinance commercial banks' lending to micro, small and medium enterprises (MSMEs). This move is also expected to benefit microfinance institutions (MFIs) as they fund micro enterprises. The proposals are expected to help channel much-needed bank funds to MFIs, which have been witnessing a severe cash crunch ever since the Andhra Pradesh Microfinance Institutions Act came into effect. Terming MFIs "an important means of financial inclusion," Finance Minister Pranab Mukherjee also proposed a Rs 5-billion fund to promote women's self-help groups. "We are particularly pleased that this reconfirmation that microfinance is a national priority is backed by concrete measures that will augment the flow of credit to the sector," S. Dilli Raj, chief financial officer, SKS Microfinance, the country's largest micro lender, said in a statement. Reacting to the proposals, shares of the company rose up to 7.6% from their previous close before ending the day up more than 2% at Rs 621.80  in a Mumbai market, which ended up 0.7%. The government is also considering a regulatory framework to protect the interests of small borrowers, who form the bulk of the clientele of MFIs. The legislation by the government of Andhra Pradesh, which is the largest market for MFIs, was introduced late last year following complaints about high interest rates, aggressive recovery practices and over-extended borrowers. A Reserve Bank of India panel, appointed in response to these issues, has also recommended an interest rate cap of 24% on individual loans and limited at two the number of microfinance firms that can lend to the same borrower.