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After finding the terms of special refinance facility announced by the Small Industries Development Bank of India (SIDBI) under the Reserve Bank of India's liquidity scheme too stringent, microfinance institutions (MFIs) have sought relaxations in the scheme. In a letter written by Sadhan, a body of microlenders, to Sidbi and the RBI, microlenders have requested to include lower-rated companies in the scheme besides increasing the repayment period of the loan.
On April 17, announcing the second round of COVID-19 relief measures, RBI Governor Shaktikanta Das had announced refinancing support to the tune of Rs 50,000 crore through all India financial institutions such as NABARD, SIDBI and NHB.
The central bank said NABARD will be given Rs 25,000 crore for refinancing regional rural banks (RRBs), SIDBI will be given Rs 15,000 crore and Rs 10,000 crore will be given to NHB for supporting housing finance companies (HFCs). Advances under this facility will be charged at the RBI's policy repo rate at the time of availment, the RBI said.
On April 23, Moneycontrol had reported that the refinance scheme announced by Sidbi may fail to help MFIs due to strict eligibility criteria.
According to the terms detailed in the circular issued by SIDBI to CMDs of commercial banks, NBFCs and MFIs under the tag of ‘scheme for special liquidity support for MSMEs (micro, small and medium enterprises), the loan needs to be repaid within a period of 90 days. Also, MFIs and small companies need to have a minimum BBB-rating as on March 31.
These two conditions will render the majority of MFIs and small companies ineligible for the scheme. Sadhan has requested to bring down the rating requirement to BB to enable more institutions to be made eligible, citing that non-NBFC-MFI consider only MFI grading, as most of them do not get themselves rated due to the costs involved.
Also, microlenders have requested to extend the repayment period to atleast 12 months, or ideally to 18-24 months. “The 90-day period fixed is too short for the MFIs to use this facility to increase their loaning, or even to smoothen their liquidity,” Sadhan letter says. Moneycontrol has reviewed the letter. Sidbi notified the scheme after it received Rs 15,000 crore from the RBI under the special Covid-19 liquidity measure.
Out of the 215 members of Sadhan, only 30 MFIs have even BBB- rating. There are 66 NBFC-MFIs under Sadhan. If the rating stipulation can be up to BB, many of these companies will benefit since very few have BBB-. “One should understand the profile of these companies. A good chunk of the microlenders are not mainstream companies,” said P Satish, executive director of Sadhan.
MFIs typically lend to low-income borrowers, who are mostly daily-wage earners or run microbusinesses. These loans are given for 18-24 months at a rate of 21-23 percent. The average loan ticket size is around Rs 30,000. Meeting the 90-day repayment requirement is impossible for NBFC-MFIs and MSMEs to comply since their cash flows have dried up severely. The bigger NBFCs may have the bargaining power to negotiate rollover of these loans beyond 90-days that will then lead to evergreening of loans. But small firms with low rating do not stand a chance.
Banks typically prefer big companies with top ratings for giving loans due to the perceived high-risk. Banks fear that once the lockdown period is over, MFIs will see large scale defaults and the RBI’s temporary measures may not come to their rescue then. The lending decisions will be questioned at that point when bad loans spike.