RBI may allow SFBs to lend to smaller microfinance institutions with loan assets below Rs 500 cr – The Economic Times

Clipped from: https://economictimes.indiatimes.com/industry/banking/finance/rbi-may-allow-sfbs-to-lend-to-smaller-microfinance-institutions-with-loan-assets-below-rs-500-cr/articleshow/79647334.cms

SynopsisRBI, which had earlier turned down a similar proposal, is now actively considering it so that the funding requirement for the sector is met, two people familiar with the matter told ET.

Kolkata: The Reserve Bank of India is contemplating revising the priority sector rules to boost funding to smaller microfinance institutions (MFIs), which despite several regulatory attempts are still facing challenges in getting bank loans.

Accordingly, the central bank may allow small finance banks (SFBs) to classify their lending to smaller MFIs with loan assets below Rs 500 crore as priority sector loans. At present, only universal banks are allowed to classify loans to MFIs as priority sector.

RBI, which had earlier turned down a similar proposal, is now actively considering it so that the funding requirement for the sector is met, two people familiar with the matter told ET. Just about in September, the regulator revised the priority sector guidelines.

The further adjustment in the rule, would also ensure smaller MFIs receive finances at lower cost. They typically borrow from non-banking finance companies at a higher cost and also lend at slightly higher rates than the top 10 MFIs. Out of 123-odd MFIs, about 100 have loan portfolios below Rs 500 crore.

Last week, RBI held a meeting with microfinance industry association Sa-Dhan and chief executive of a few SFBs on the subject. RBI executive director Anil Kumar Sharma, who looks after the Financial Inclusion and Development Department was present.

It is learnt that leaders of the SFB sector showed their willingness to finance smaller MFIs and requested the regulator to consider these loans as priority sectors.

In response, RBI said that the proposal can be considered if and only if it ensures cheaper funds to the ground. The regulator told them to furnish details of the borrowing profile of smaller MFIs, their cost structure and lending rates.

The present rule mandates SFBs to provide 75% of their total loans to the priority areas.

Jana Small Finance Bank chief executive Ajay Kanwal, ESAF Small Finance Bank K Paul Thomas, Sa-Dhan executive director P Satish were present at the meeting, held on digital platform.

The microfinance firms have borrowed a total of Rs 13358 crore between April and September, while just about 7.5% of it were meant for MFIs with less than Rs 500 crore loan portfolio, data compiled by Sa-Dhan showed. This has been the ground-level scene despite RBI’s liquidity boosting measures targeted at smaller firms.

As many as 98 out of 123 MFIs fall in the below Rs 500 crore category. “Banks are only comfortable to lend to bigger MFIs with higher credit ratings,” a chief executive of a small MFI said. “We get loans from NBFCs but at a higher cost. But in a challenging time like this, they are also hesitant,” he said.

The industry leaders are of the view that a priority sector status for SFB loans to smaller MFIs would address the gaps in their funding requirement

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