MFIs not given enough funding

Indian banks are not lending to microfinance institutions (MFIs) especially mid size and small sized ones. Even though cost of funds has reduced, banks have not encouraged lending to the MFIs.

MFIs not given enough funding
MFIs not given enough funding

MFI’s are organizations that offer financial services to low income populations. Almost all give loans to their members, and many offer insurance, deposit and other services. However with lending from banks reducing it impacts the lower income population in India to gain loans.

MFIs rely quite heavily on banks for funding. Approximately 60% of funding comes from banks.The remaining is gained from instruments such as securitization and debentures.

Rakesh Dubey, President of Micro Finance Institutions Network said, “In the past year, the cost of funds for MFIs has gone down by 60-70 basis points. However, banks have remained cautious in lending, due to their own problems. As a result, a lot of MFIs are looking at options like non-convertible debentures, which is long-term lending; the amount is also bigger.”

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The issue is with no funding, MFIs are slowly trying other approaches to gain capital. Pricing of micro loans is linked to the cost of fund as Reserve Bank of India has capped the margin for non banking finance companies- microfinance institutions (NBFC-MFIs) at 10%. RBI rule says MFI’s lending rate cannot be more than 10% over their cost of fund or 2.75 times of the average base rate of five large banks, whichever is lower.

Founder and Managing Director of Satin Creditcare Network, H P Singh said, “Several MFIs are now also experimenting with options like co-lendng to meet fund requirements.”

An understanding of co lending needs to be looked into. Co lending is a form of loan participation where two or more lenders are named as the secured party in a statement and the financing agreement.

Many MFI’s are doing their best to comply with RBI guidelines such as Fusion and Arohan Financial Services.