Kolkata: Lingering asset quality concerns in the microfinance sector and internal margin pressure have prevented banks from lowering rates significantly when lending to microfinanciers despite a percentage-point cut in policy rates since February.
"The transmission of lower policy rate is slow for microfinance institutions because of reset issues and higher risk perception," said Jiji Mammen, executive director, Sa-Dhan, a self-regulator for the sector.
Some large NBFC-MFIs have seen their incremental borrowing cost reduce merely about 5-25 basis points this year so far even after seven months of the beginning of the softer rate cycle that has seen the policy repo rate reduce a full percentage point to 5.5%. Some bottom-of-the-pyramid financiers have even seen an increase in borrowing costs compared to what it was last year.
Banks have tightened their purse strings for smaller microfinance companies amid continued asset quality stress. Even if they lend, they are charging a higher risk premium over the lending rate benchmark, leading to a rise in effective interest rates, two people cited above said.
"Banks are slow in passing on the lower rate benefit as they are trying to protect their margins. Some banks have also increased the risk premium, especially for smaller MFIs, leading to a rise in borrowing rates," the head of an NBFC-MFI said, on the condition of anonymity.
Those that borrow funds at a rate linked to marginal cost of fund based lending rate ( MCLR) get the benefit of an accommodative monetary policy only when the benchmark rate is reset, which typically happens over six months or a year.
"Transmission of rates has started taking place but it was slower than our expectations. Normally, it takes six months to get the benefit of lower rates. But this time it took longer to get the benefit of the first 25 basis points rate cut in February," said Muthoot Microfin chief executive Sadaf Sayeed.
However, the benefit is only available on the floating rate loans.
MCLR Dominant
A sizable chunk of bank financing for MFIs is on a fixed-rate basis, people aware said.
NBFC-MFIs received a total of Rs 12,781 crore in debt funding in the first quarter of the fiscal, a 20% drop as compared with the year-ago period, showed the data published by another self-regulator, Microfinance Institutions Network (MFIN).
"The lenders have become very selective in lending to MFIs. The small and mid sized MFIs are finding it difficult to raise funds, which are basically the raw material for their business. It becomes difficult for them to continue operations without funding support," Sa-Dhan's Mammen said.
NBFC-MFIs' outstanding borrowing stood at Rs 96190 crore at the end of June. Banks contributed about 63% of the total borrowing received followed by non-bank entities (12.7%) and financial institutions (8.6%). The balance came through external commercial borrowing (12.1%) and other sources.
"We are in touch with banks and financial institutions such as Nabard and SIDBI for funding support. Some of the banks have told us that they are ready to fund provided some comfort in the form guarantee or something similar is made available," Mammen said.
"In the current situation the risk perception of lenders is higher. We are also exploring with the government the possibility of creating a guarantee programme tailor made for the microfinance sector," he said.
MFIN also wrote to the government mid-July, seeking a Rs 15-20,000 crore credit guarantee scheme for the sector.
"The transmission of lower policy rate is slow for microfinance institutions because of reset issues and higher risk perception," said Jiji Mammen, executive director, Sa-Dhan, a self-regulator for the sector.
Some large NBFC-MFIs have seen their incremental borrowing cost reduce merely about 5-25 basis points this year so far even after seven months of the beginning of the softer rate cycle that has seen the policy repo rate reduce a full percentage point to 5.5%. Some bottom-of-the-pyramid financiers have even seen an increase in borrowing costs compared to what it was last year.
Banks have tightened their purse strings for smaller microfinance companies amid continued asset quality stress. Even if they lend, they are charging a higher risk premium over the lending rate benchmark, leading to a rise in effective interest rates, two people cited above said.
"Banks are slow in passing on the lower rate benefit as they are trying to protect their margins. Some banks have also increased the risk premium, especially for smaller MFIs, leading to a rise in borrowing rates," the head of an NBFC-MFI said, on the condition of anonymity.
Those that borrow funds at a rate linked to marginal cost of fund based lending rate ( MCLR) get the benefit of an accommodative monetary policy only when the benchmark rate is reset, which typically happens over six months or a year.
"Transmission of rates has started taking place but it was slower than our expectations. Normally, it takes six months to get the benefit of lower rates. But this time it took longer to get the benefit of the first 25 basis points rate cut in February," said Muthoot Microfin chief executive Sadaf Sayeed.
However, the benefit is only available on the floating rate loans.
MCLR Dominant
A sizable chunk of bank financing for MFIs is on a fixed-rate basis, people aware said.
NBFC-MFIs received a total of Rs 12,781 crore in debt funding in the first quarter of the fiscal, a 20% drop as compared with the year-ago period, showed the data published by another self-regulator, Microfinance Institutions Network (MFIN).
"The lenders have become very selective in lending to MFIs. The small and mid sized MFIs are finding it difficult to raise funds, which are basically the raw material for their business. It becomes difficult for them to continue operations without funding support," Sa-Dhan's Mammen said.
NBFC-MFIs' outstanding borrowing stood at Rs 96190 crore at the end of June. Banks contributed about 63% of the total borrowing received followed by non-bank entities (12.7%) and financial institutions (8.6%). The balance came through external commercial borrowing (12.1%) and other sources.
"We are in touch with banks and financial institutions such as Nabard and SIDBI for funding support. Some of the banks have told us that they are ready to fund provided some comfort in the form guarantee or something similar is made available," Mammen said.
"In the current situation the risk perception of lenders is higher. We are also exploring with the government the possibility of creating a guarantee programme tailor made for the microfinance sector," he said.
MFIN also wrote to the government mid-July, seeking a Rs 15-20,000 crore credit guarantee scheme for the sector.
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