Ed: Is Yes Bank doing right in recalling loans to microfinance institutions?

Microfinance Focus, December 27, 2010: Receiving yet another blow, the aggrieved microfinance institutions are now being asked by private sector lender, Yes Bank to pay back their loans by the year end. According to a Livemint report, the Bank has sent notification to MFIs seeking a recall of around Rs 100 crores of loans which it has advanced to them.  YES Bank however declined to comment on its move citing client confidentiality.

Oddly enough, Yes Bank’s decision to recall loan has comes after a recent Reserve Bank of India meet with the bankers where RBI urged banks not to choke lending to microfinance institutions. The RBI said that microfinance is an important sector for the growth of the country and banks should continue lending to it.

Exhibiting low confidence on sector’s performance even outside of Andhra Pradesh, Yes bank has sent notification to microfinance institutions which are operating outside AP and have not been radically affected by the microfinance ordinance which was issued by the state government two months ago.

Bangalore based Ujjivan Financial Services and Chennai based Equitas Microfinance for instance have been asked to pay back their loans by December 31 along with few other MFIs according to media report.

Yes Bank started lending to microfinance sector in the financial year 2007 and as on March 2010 it was lending to 17 MFIs and was planning to lend to 20-25 MFIs by the end of this year. However, the bank seems to have taken a U-turn post promulgation of microfinance ordinance in Andhra Pradesh.

Microfinance institutions till now were benefitting from the priority sector status and availed banks loans at concessional rates. According to a Morgan Stanley report, banks contributed almost 80% of the money lent by microfinance institutions to poor customers and Yes Bank in particular had a total exposure worth Rs. 450 crores to the microfinance sector as on November 2010.

Earlier this year, RBI even recommended withdrawing priority sector status of microfinance. Most private and foreign banks use this facility to fulfil their priority sector lending targets. However, sensing an opportunity to boost profits in this form of lending, many banks have been very aggressive in their lending to MFIs. The competition that followed among bankers to lend to select few profitable and professional MFIs has helped some of these institutions to raise funds at competitive rates besides bargaining power, the RBI report stated.

A top-rated MFI can raise funds from banks at close to 12-13% or a little higher. However under the present circumstances, when the future of the industry looks bleak, banks can deploy funds on promising and even higher yielding assets where the rate of interest is even higher.

The RBI-Bankers meeting that was held last Wednesday in Mumbai generated a lot of hope among microfinance practitioners who are reeling under liquidity crunch due to reduced banks lending to the sector in the wake of the Andhra Pradesh microfinance crisis.

During the meeting, the banks were of the view that while the structural issues regarding the MFI sector may be addressed by the RBI’s Malegam Committee, some interim measures may be required to address the gap between the recoveries by MFIs and their payment commitments to banks. The banks stressed on the need to work out an interim arrangement involving, inter alia,  rescheduling of exposures to MFIs subject to certain covenants such as MFIs agreeing to reduce their leverage and growth projections.

As far as at the banks’ exposures to MFIs were concerned, the MFIs had so far been able to meet their repayment obligations to the banks till November 2010. However, going forward this may be a matter of concern and has become a cause of unrest amongst the bankers.

Banks who till recently were lining up to invest in microfinance seem to have lost confidence in the sector and are in a hurry of find exits. Yes Bank’s move to recall loans can further trigger instability in the sector whose funds are already drying up. A wait till Malegam Committee comes out with a report on the sector could be a wiser option.



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