MFIs seek emergency credit line, partial credit guarantee scheme from RBI to fight COVID-19 second wave

Sa-Dhan, one of the major industry associations of microlenders, has written to the Reserve Bank of India (RBI) seeking an emergency credit line to fight the challenges posed by the COVID-19 second wave.

Microfinance Institutions (MFIs) are firms that lend small loans to tiny borrowers at 22-24 per cent and mainly source money from banks to  do business.

MFIs have sought an emergency credit line of up to 25 per cent of their outstanding with their lending banks, Sa-Dhan said. MFIs would be able to mobilise Rs 15,000 crore if this is implemented and it will help in the immediate flow of funds to MFIs from banks, Sa-Dhan said in its letter.

On May 5, Moneycontrol had reported that MFIs are planning to seek more assistance from the RBI.

MFIs have sought a special liquidity facility of at least Rs 15,000 crore through NABARD and SIDBI. "At least 40 per cent of funds under this may be earmarked for MFIs with portfolio below Rs 500 crore. A targeted funding facility like this will help MFIs to a great extent," the body said.

It said low cost funds from DFIs would help in improving the margins which otherwise is shrinking due to high credit costs, operation costs and low interest rate regime.

Further, the lending from banks to microfinance sector under on-tap TLTRO (targeted long-term repo operations) should be given a push and monitored closely through a tracking mechanism by RBI to ensure timely flow of funds to the sector, Sa-Dhan has said.

"If the sector could be supported with amount of Rs 25,000 Crs under this funding window, it would immensely help MFIs in coping their liquidity and funding challenges. During TLTRO 2.0 we had observed that, even large MFIs with good rating were not able to receive any support under the funding window," Sa-Dhan said.

Other demands include a partial credit guarantee scheme 3.0 to boost confidence of banks in the present uncertain times to lend to the microfinance sector especially small and mid-size MFIs with relatively lower ratings.

Sa-Dhan has also requested a loan moratorium from banks and development financial institutions or restructuring support for up to six months to one year. During the first wave of COVID, only 40 per cent of lenders provided moratorium to MFIs which led to severe liquidity crunch for MFIs, Sa-Dhan said.

It has also requested to replace the present base rate linked interest rate cap with margin cap based interest rate with an overall cap of 26 per cent or inclusion of base rate of SFBs in the overall base rate calculation.

"As the financial status of MFIs pre and during COVID may have lot of difference, Banks and DFIs may be advised to follow context specific lending norms allowing certain relaxations in rating and grading rather than rigid norms that were designed for Pre-COVID conditions, so that it would facilitate better flow of funds," Sa-Dhan said.

Also, MFIs should be allowed relaxations on provisioning norms based on IND-AS upto December 2021 to facilitate lower provisioning and better liquidity, the letter said.

On May 5, the RBI Governor Shaktikanta Das said small finance banks (SFBs) can classify loans to MFIs under the priority sector lending (PSL) category. PSL refers to mandatory lending by banks to economically weaker sections. Banks need to lend 40 per cent of their loans to this category.