Microfinance firms feel the ripple effect of liquidity crisis

Small- and mid-sized microfinance firms are facing liquidity crisis to the extent that some of them are being forced to stop fresh lending.

According to rough estimates, about 29 small and medium microfinance institutions (MFIs) need at least ~5 billion in the next quarter, said sources in the MFI industry.

The liquidity situation has worsened over the last fortnight as non-banking financial companies (NBFCs) themselves are struggling for funds owing to defaults by Infrastructure Leasing & Financial Services.

Typically, for small MFIs, more than 95 per cent of borrowing is from NBFCs, while for mid-sized ones it is about 75 per cent.

The MFI Network (MFIN) has called a meeting on November 1 with lenders, including rating agencies, NBFCs, private banks, and public sector banks to discuss the liquidity crisis. About 21 lenders are expected

to attend the meeting.

The MFIN will also take up the matter with the government and the Reserve Bank of India (RBI), according to a senior official at the MFIN.

“There is no business growth, and we are somewhat floating through recycling the existing funds. There is no fresh funding. At the MFIN level, we are in touch with the government and the RBI. The challenge is more acute for smaller MFIs,” said Satyavir Chakrapani, managing director (MD) and chief executive officer (CEO), Shikhar Microfinance, a small MFI with an asset base of around ~700 million.

“It is logical for us to slow down on fresh disbursements. While there is no risk asset-liability mismatch in the MFI sector, the problem is lack of funding for growth,” said Meenal Patole, CEO, Agora Microfinance India.

The RBI recently allowed banks to allocate up to 15 per cent of their lending to NBFCs that do not finance infrastructure projects, against 10 per cent earlier. However, the measure has not been of much help to MFIs.

Even bigger MFIs have cut their fresh disbursement due to liquidity crunch.

“The flow of funds from banks and other financial institutions has become limited. We have slowed our fresh disbursement by about 50 per cent,” said Kuldip Maity, MD of Village Financial Services, a Kolkata-based MFI with a loan outstanding of about ~9.50 billion.

Over the last month, on average, the cost of funds of MFIs has gone up by 2550 basis points. Capital constraints in the middle of the festive season are likely to dent the growth of MFIs this year.

NBFCs and MFIs account for roughly 33 per cent, about ~449 billion, of microlending market in India, according to the MFIN data. The size of the microfinance industry stands at about ~1,481 billion.

Over the last few months, the MFI sector has been witnessing a growth rate of about 40 per cent on a year-onyear basis.

A recent report by credit rating agency Icra suggests MFIs would need between ~60 billion and ~90 billion over the next three years to service their growth plans.