A liquidity crunch has hit several microfinance institutions with the flow of funds 'temporarily' drying up after the largest MFI lender, ICICI Bank, halted payments in early January following concerns raised by the Reserve Bank of India about adherence to customer identification norms and record-keeping in the 'partnership model' of micro lending.
M Udaia Kumar, managing director, Share Microfin, said, "The
ICICI Bank stopped disbursing loans to partner MFIs from January 1. The flow of funds has come to a standstill affecting over 100 MFIs."
In a partnership model, loans given through MFIs are shown in the bank books, but the MFIs also share a part of the credit risk, say up to 10 per cent.
The central bank has said it has no problems with the partnership model but wants the banks to adhere to the customer identification (know your customer) norms. It wants the banks to monitor record-keeping and management information systems in microfinance lending and not leave such functions to the MFIs.
CS Murthy, chief general manager-in-charge, Reserve Bank of India said, "For one bank, we were concerned about how exposure has been documented in their books and other paperwork. Three days ago, we received a letter from the bank explaining its stance and providing some information and we are looking into it."
A large part of the ICICI Bank's microfinance exposure is through the partnership model. This model has been adopted by banks because the low capital base of MFIs restricts the extent of direct term lending to MFIs for onlending to small borrowers. The partnership
model allows the banks a greater microfinance exposure through MFIs.
ICICI Bank MD Nachiket Mor said, "We are working with MFI partners to bring in state-of-the-art technology and implement KYC processes in line with the present guidelines."
ICICI Bank has lent about Rs 2,500 crore (Rs 25 billion) to about 200 MFIs. HDFC Bank and Yes Bank have also entered into partnership model arrangements with MFIs, but their exposures are still very small.
Kumar said, "We had access to Rs 60-70 crore (Rs 600 to Rs 700 million) of funding every month. Many clients would be deprived of the loans now. The bank is considering
giving us term loans, but capital adequacy norms restrict leverage to 5-6 times the capital base."
Officials at MFIs warn that small borrowers need access to loans to recapitalise their businesses and are likely to start defaulting to 'protect liquidity'.
However, the central bank has not asked any bank to stop funding MFIs under the partnership model. The RBI wants banks to be in possession of the promissory notes, which will be redrawn in their favour and photocopies of photographs and other details of the borrowers'.
"For every small loan disbursed, the RBI wants documentation to be with the bank. With borrowers mostly living in remote villages, taking documents to the banks' branches on a daily basis poses operational difficulties," Kumar said.
Mor said that ICICI Bank had a long-term commitment to microfinance. "We are constantly working to further build on the key drivers of success of the microfinance industry including a robust technology platform, complete transparency (through a management information system) and (adherence) to KYC norms."
