COVID-19 Second Wave: Microfinance Sector Requests Additional Support from RBI

The microfinance industry asked for additional support from the Reserve Bank of India (RBI), which includes an extension of the emergency credit line, to combat the challenges arising from the second wave of COVID-19.

Sa-Dhan, an association of the microfinance sector, wrote a letter to the RBI asking for the Partial Credit Guarantee Scheme 3.0, special liquidity facility, emergency credit line, in addition to the recently announced RBI support measures.

Sa-Dhan executive director Mr P Satish said that just when we were coming out of the effects of the first wave of the COVID-19, the second wave has descended on us with a vengeance. Also, he stated that the timely intervention of RBI and the recent announcement of Special Long-Term Repo Operations (SLTRO) of Rs.10,000 crore for Small Finance Banks (SFBs) has immensely helped the sector. The categorisation of lendings by SFBs to Micro Finance Institutions (MFIs) as Priority Sector Lendings has helped them.

Last week, the RBI decided to conduct an SLTRO of Rs.10,000 crore at the repo rate for the SFBs, to be utilised for fresh lending of up to Rs.10 lakh per borrower. These funds should be utilised to support the micro and small industries, small business units, and other unorganised sector entities adversely affected during the second wave.

The smaller MFIs are now being permitted to reckon fresh lending to smaller MFIs with an asset size of up to Rs.500 crore for on-lending to individual borrowers as a priority sector lending. This decision was made to face the fresh challenges posed by the pandemic and address the emergent liquidity position of SFBs. The RBI extended this up to March 31, 2022.

Mr Satish requested that the industry needs further extended support from the RBI, such as supporting MFIs with an emergency credit line of up to 25% of their outstanding with their lending banks. If this move is implemented, MFIs would be able to mobilise Rs.15,000 crore, which may help in the immediate flow of funds to MFIs from banks.

Sa-Dhan also sought a special liquidity facility of at least Rs.15,000 crore through NABARD and SIDBI to MFIs. Also, earmarking at least 40% of funds under this for MFIs with a portfolio below Rs.500 crore would support the small MFIs. Under the On-Tap Targeted Long-Term Repo Operations (TLTRO), RBI may consider lending Rs.25,000 crore from banks to MFIs to help MFIs cope with their liquidity and funding challenges.

Sa-Dhan also urged the RBI to consider introducing a Partial Credit Guarantee Scheme 3.0 to help boost banks’ confidence in the present uncertain times to lend to the microfinance sector, especially small and mid-size MFIs with relatively lower ratings.

It also requested removing the present base rate linked interest rate cap with margin cap based interest rate with an overall cap of 26% or inclusion of a base rate of SFBs in the overall base rate calculation.

For any clarifications/feedback on the topic, please contact the writer at dvsr.anjaneyulu@cleartax.in