Credit Crunch Drives another Nail in MFIs’ Coffin

Mumbai, Mar,20. If one didn’t know better, it would seem that the microfinance industry in India is in the throes of heaving its last breath with the flat refusal by banks to lend credit to microfinance institutions (MFIs), as the chances of loan recovery are nothing if not slim. As the credit-crunch precipitated by the refusal by banks to lend credit to MFIs drives another nail in the dying industry, Vijay Mahajan, President of Microfinance Institutions Network (MFIN), an industry group, feels that a clutch of MFIs may be forced to shut down their businesses as early as 1 January. “Come January, and we are dead,” he said.

Vijay Mahajan’s comment came on the sidelines of a banking conference here. MFIN which comprises 44 member companies accounts for nearly 80% of the microfinance lending in India.

Mahajan said MFIs are ready to provide any collateral that they are asked to even if it is equity, but he added that banks have not lent at all to the microfinance sector in the last six weeks. Corporation Bank, CMD, Ramnath Pradeep, said that he had told his MFI clients that any new lending would entail their agreement, of necessity, to the conversion of loans into equity in case of a default.

Bank funding for MFIs has come to a virtual stop ever since the Andhra Pradesh government issued an ordinance to coerce recovery and began capping loan rates which caused lending and collections to nosedive and private-equity backed micro-lenders to delay sale of shares