File image of Reserve Bank of India (RBI) Governor Shaktikanta Das
The crisis-ridden microfinance industry has asked the Reserve Bank of India's permission to restructure borrower loans and sought urgent liquidity assistance as the second coronavirus wave hurts operations, sources have said.
RBI Governor Shaktianta Das on May 3 met the representatives of NBFC- MFIs and the two industry associations— Sa-Dhan and MFIN (microfinance institutions network), sources said. Deputy governors MK Jain and MD Patra and other top RBI officials attended the meeting.
"The RBI should nudge the banks to increase their lending to MFIs. If need be banks may be directed to lend a percentage of their PSL portfolio to MFIs. Banks and FIs may be advised to relax their norms for lending, including rating norms, as a special case for this year," an MFI representative said during the meeting.
MFIs are institutions that give small-ticket loans and mostly source funds from banks to do business.
COVID impact on the industry
MFIs representatives said though the sector recovered from the severe impact of the lockdown in April-June, 2020 and was returning to normal, the second coronavirus wave and intermittently increasing local lockdowns were creating problems for the sector, sources said.
They said a larger number of MFI staff were being affected by the second wave, leaving the employees worried.
Also, a large number of borrowers and their families were also ill, even in rural areas, when compared to last year's outbreak. Many MFIs reported normal collection levels in the early part of April but it was slowing down as livelihoods of borrowers were getting hit and they were conserving cash, the industry officials told the RBI.
MFIs would be hit if the lockdowns were to be continue. If the infections don't slowdown by May-end, it would borrowers and their businesses, the officials said.
"RBI has to allow flexibility to MFIs in restructuring the loans of their borrowers. Most of the borrowers of microfinance sector are prompt in repayments. However, due the disruptions in livelihoods many would need postponement of instalments, etc," another MFI official said.
Also, the MFIs should have the freedom to take decisions on requests for putting off or restructuring without attracting the provisioning norms as this would impair the already thin margins on which MFIs operate. The existing provisions of relief in cases of natural calamities could be applied in this case, MFIs said.
They said restructuring at borrower level should also be accompanied by a moratorium/postponement of instalments to MFIs by lending banks and financial institutions, MFIs said.
It was pointed out that last time there was confusion over the moratorium to MFIs. Only 40 percent of MFIs received this benefit from their lenders. NABARD, SIDBI and MUDRA did not extend the moratorium to their borrower MFIs on the plea that there is no moratorium on refinance.
This has adversely affected MFIs that were overly dependent on these institutions, industry officials said. "RBI may ensure that all banks and FIs extend the facility of postponement of instalments/moratorium to all their borrower MFIs without exception," the associations said.
Sources said MFIs also sought urgent liquidity support from the RBI, especially for small and medium MFIs. Many banks were withholding funds even after loans had been sanctioned. RBI’s special liquidity facility (SLF) through NABARD and SIDBI was useful last year but it went to a limited number of institutions.
"This time there is need for reserving a part of SLF to MFIs, and of that allocating one portion specifically to small and medium MFIs and ensuring that it is equitably distributed amongst all MFIs. There is a need for RBI to increase the quantum of funding under SLF. Apart from funding from DFIs, funds flow from banks-- both public sector and private sector-is also needed for the microfinance sector," MFIs told the RBI.
The RBI was also told that the average base rate formula for pricing the loans was leading a number of MFIs into losses. Industry representatives said they were not getting funds at the rate declared by the central bank, sources said. Most were paying 13-15 percent interest rate and some even as high as 17-19 percent.
They requested the RBI to follow only the 10- 12 percent margin on cost of funds without the cap of 2.75 percent times of the average base rate declared quarterly, sources said. Banks with microfinance verticals enjoyed a margin of 20 percent in their microfinance portfolio, charging interest of around 24 percent, while their cost of funds was around 4 percent.
The problems arising out of restrictions on opening of current accounts were also brought to the notice of the governor, with a request for amending the guidelines to ease the operational problems of MFIs, sources said.
Sources said Das stressed on the need for appropriate governance and risk management culture in the MFIs, compliance to all regulatory requirements, lending on prudent lines with proper appraisal systems and avoiding over indebtedness of borrowers, reasonable interest rates and proper grievance redressal mechanism for the clients.