Guarantees for loans from MFIs to boost lending in rural areas, experts say

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Credit guarantees to facilitate microloans are expected to improve liquidity for MFIs, especially smaller ones, and revive lending from the second quarter after very low volumes in April-June.

Alok Misra, managing director and director of the Microfinance Institution Network (MFIN), said the program would cover term loans from banks to MFIs, unlike only commercial papers and non-convertible bonds in last year’s program. This will facilitate the flow of funds in these difficult times.

Guarantees will be provided to banks for loans to new or existing MFIs or MFIs, for loans of up to Rs 1.25 lakh to around 2.5 million small borrowers. The guarantees cover the funding provided to MFIs and NBFC-MFIs until March 31, 2022 or until guarantees in the amount of Rs 7,500 crore are issued, whichever comes first, according to the presentation of the Ministry of Finance .

MFI executives said the review is improved in three ways. First, the term of the loan covered was extended to three years (36 months) from 18 months previously. The old system gave a limited time to use the resources, but now the mandate is longer. Second, the interest rate charged by banks is capped. Thus, the funds will be available at relatively cheaper rates for MFIs.

Third, for debenture financing, institutions had to provide an advance guarantee under the previous regime and did not have time to create new loans. And during a lockdown, with collection efficiency issues, the free wallet available for guarantees was limited. With the credit guarantee in place, MFIs may have 3 to 4 months to create the portfolio and pledge it. Many people who are behind in the payment schedule can also be funded, they added.

Standard client eligibility, pricing guidance, focus on new loans, and guaranteeing up to 75% of the default amount will ensure substantial benefits for microfinance clients, Misra said.

P Satish, executive director of Sa-Dhan, a lobby group in the microfinance industry, said the combined borrower base of NBFC-MFIs and nonprofit MFIs is 48.1 million. There are 90 nonprofit MFIs and the NBFC MFI count is over 80.

Small and medium-sized MFIs faced difficulties in obtaining funds from banks. Credit guarantees reassure banks for loans to microfinance institutions. The amount (Rs 7,500 crore) will be useful to revive loans after the post-containment period. The second quarter is expected to start with disbursements from microfinance institutions, Satish said.

Sadaf Sayeed, CEO of Muthoot Microfin, said the program would stimulate new lending from banks to MFIs and solve the short-term funding shortfall the sector faces. MFIs can reach remote rural areas of the country and extend the line of credit to the bottom of the pyramid. It will provide the necessary impetus for credit growth in the rural economy.

According to data from Sa-Dhan, the gross loan portfolio (GLP) of NBFC-MFIs increased by 3% from Rs 70,142 crore in September 2020 to Rs 72,242 crore in December 2020 and that of MFIs in 6% non-profit compared to Rs 1,772 crore in September 2020 to Rs 1,871 crore in December 2020.

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