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Banks bullish on microfinance post AP crisis, thanks to RBI rules

Sachin Kumar, Hindustan Times  Mumbai, August 15, 2012
First Published: 21:03 IST(15/8/2012) | Last Updated: 21:05 IST(15/8/2012)

The microfinance sector has again started witnessing a flow of funds from banks — which had become hesitant in lending to micro lenders in 2011 —  encouraged by the new set of regulations introduced by the Reserve Bank of India (RBI). The new rules brought in clarity in the regulation of microfinance institutions (MFIs).


“We have had a dramatic turnaround in situation from the fourth quarter (January- March) of 2011-12,” said S Dilli Raj, chief financial officer, SKS Microfinance. “For the first nine months, all that we could access was an incremental debt of Rs. 417 crore while in the fourth quarter we were able to raise Rs. 998 crore, primarily from banks.”

Banks became cautious in lending to MFIs after the Andhra Pradesh crisis. After reports of suicide of borrowers in Andhra Pradesh (AP), the state government had come out with the AP Microfinance Ordinance in October, 2010, and subsequently made it into an Act which crippled the activities of all MFIs.

“With the promulgation of the Andhra Ordinance regulating MFIs in 2010, the industry found itself in an environment of heightened regulatory and political risks which resulted in bank funding coming to a virtual halt in 2011,” said Alok Prasad, CEO, Microfinance Institutions Network. “However, with consistent signals of support from the RBI and the finance ministry, risk perceptions have improved and in the last quarter of 2011-12, there was a significant inflow of fresh bank funds, albeit to select MFIs.”

In the second half of 2011-12, RBI said the loans extended by banks to MFIs from April 1 will be classified as priority sector lending. Also the Microfinance Bill, which makes RBI a sole regulator, has been tabled in Parliament and it is expected to be passed some time this year.

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