NEWS WIRE: India: Global Credit Crunch Affects Microfinancing

Source: Sify Technology.

Original news wire available here.

India, September 24 – The global credit crunch has led to a significant drop in fund flow to the microfinance sector. Banks, which are required to provide 32-40 percent of their loans to the priority sector (which includes rural credit), are the largest providers of funds to MFIs.

They lend to microfinanciers, who then on lend to the poor at a higher rate. But with banks’ lending rates rising more than 200 basis points over the last quarter, microfinanciers are finding it tough to get enough funds to sustain business.

“We raised money a couple of months ago so we are safe. But for entities that didn’t, it’s going to be very difficult,” said K. Vinod Kumar, Assistant Vice-President, member services at SKS Microfinance.

Microfinanciers don’t want to raise lending rates themselves —- they already hover around 20 percent plus —- as it would mean a reduction in business and would hamper expansion.

“The demand for funds is high because microfinanciers have drawn up aggressive growth plans. But cost of funds remains a concern. There has been a 150-200 basis points (1.5-2 percent) increase in just the last quarter,” said Royston Braganza, chief executive officer of Grameen Capital India, which serves as an investment banker for the microfinance sector.

“At least three microfinanciers operating in Orissa and Maharashtra have put fund-raising on the backburner and have not scaled up operations in the last quarter despite having ambitious plans. If rates do not come down, they are going to face a big problem,” said another industry observer, who did not wish to be named.

Not just in India, even the overseas fund kitty is facing a crunch. We had been raising funds through structured debt. We are using donor guarantees to raise funds, but the donors too are facing a crunch,” said Julie Peachey, regional director for Asia programs at the US-based Grameen Foundation. Servicing an extensive microfinance network, some banks have found, is not worth their while.

So some banks like ICICI, which were ambitiously allocating funds to the microfinance portfolio, have cut exposure. “A microfinance firm gets only USD 5.2 million (Rs 25 crore) a year from the bank, far less than what it used to earlier,” said a person familiar with the situation, who did not wish to be quoted. The problem while sourcing funds via the debt route might also affect the topline of microfinanciers, thus eroding their equity.

“The funds crunch would affect the profitability of microfinance companies. So, indirectly, the private equity side may be hit as well because their returns might get affected. It all depends on how banks react,” said Vineet.

Rai, co-founder and chief executive officer of Aavishkaar India Micro Venture Capital Fund. The problem is even more acute for smaller entities. “Some of the small players lack the financial acumen required to access the capital markets. For them, tokens are small, but the efforts to service remain the same, hence the returns are affected more,” says Siddharth Sharma, co-chief executive officer of IntelleCash, a service provider to the microfinance sector.

But investors won’t be able to keep away from microfinanciers for long, he adds. “Investors are coming in as they want to diversify away from products linked to the capital markets. Also, the defaults among microfinanciers are low,” Sharma said.

In the four years between 2003 and 2007, small borrower bank accounts (credit) i.e up to USD 523 (Rs 25,000) increased marginally from USD 771,500 (36.9 million) to USD 807,000 (38.6 million), while self-help group’s borrowing members grew from 10 million to 40.5 million and microfinance borrowers grew from 1.1 million to 8 million.