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Informist, Wednesday, Jan. 8, 2025

 

NEW DELHI – In a first-of-its-kind meeting with the finance ministry, the microfinance sector sought government support in setting up a dedicated special fund from which institutions can borrow, in a bid to bring down the ultimate pricing, said Jiji Mammen, the executive director and chief executive officer of Sa-Dhan, a Reserve Bank of India appointed self-regulatory organisation for the sector.

 

Microfinance institutions need an immediate supply of capital for their growth and sustenance, particularly the small and mid-sized microfinance institutions, Mammen told Informist in an interaction following the meeting. The meeting was attended by Department of Financial Services Secretary M. Nagaraju and other senior officials from the government's side and representatives of leading microfinance institutions and both the RBI-approved self-regulatory organisation – Sa-Dhan and Microfinance Industry Network – on behalf of the industry.

 

The microfinance sector has been facing two issues – a funding crunch and slowdown in demand for micro-lending due to higher interest rates, Mammen said. In this context, the government may consider creating a dedicated funding mechanism for providing funds to microfinance institutions in a cost-effective manner, he said. "This will also bring down the pricing of MFI loans," he added.

 

He also put forth a recommendation to set up a credit guarantee scheme to help microfinance institutions access credit from banks and other financial institutions. "We had a credit guarantee scheme only during the Covid-19 pandemic, so maybe that can be extended as a regular feature so that MFIs can borrow from banks and Development Finance Institutions," he said.

 

Another key recommendation made by Sa-Dhan included creating a special fund similar to the India Micro-Finance Equity Fund to extend equity support to small and upcoming microfinance institutions to expand their operations in the areas where most of the mainstream lenders are not available. "We have put forth this demand, hoping for a Budget announcement, but the final call lies with the government," he said. Finance Minister Nirmala Sitharaman will present the Budget for 2025-26 (Apr-Mar) on Feb. 1.

 

Following an announcement in the Budget for FY14, the financial services department created the India Micro Finance Equity Fund with an initial corpus of INR 1 billion with the Small Industries Development Bank of India focusing on smaller socially-oriented microfinance institutions with the objective of long-term sustainability of operations.

 

Mammen also pushed for a special fund for the north-eastern states, as unfortunate developments in the area have led to borrowers failing to repay their loans, as a result of which microfinance institutions are not able to service their loans, which has jeopardised both stakeholders and fund-raising ability.

 

"In order to rebuild the microfinance ecosystem within the state (of Manipur, which faced prolonged political issues), the government may think of infusion of fresh equity by extending long-term, interest–free loans to MFIs for further funding to needy borrowers and businesses. Alternatively, the Government may set up a dedicated fund at North Eastern Development Finance Corporation Ltd., in the form of a grant, or interest-free or low interest kind of fund," he said.

 

At the meeting, representatives from the microfinance sector also requested a rethink on the central bank's regulatory guidelines introduced in 2022. Previously, institutions were required to maintain at least 85% of their net assets – total assets excluding cash, bank balances, and money market instruments – as qualifying loans. However, the 2022 revision mandated that at least 75% of the total assets must now be in the form of microfinance loans. "The current framework restricts lending flexibility," Mammen said, adding that the final call on this will have to be taken by the RBI.

 

Lastly, at the meeting, representatives of the microfinance sector also sought goods and services tax waiver on co-lending with banks. The benefit of lower GST or its exemption will in turn help bring the costs down, representatives from the sector said. The current GST rate for microfinance institutions stands at 18%, which is higher than the 12% service tax charged earlier.  End

 

Reported by Priyasmita Dutta

Edited by Ashish Shirke

 

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