RBI concerned over MFI defaults;asks banks to maintain funding

"The RBI sensitised the banks to the need to maintain funding lines to MFIs on merits to prevent contagion," the central bank said in a release after meeting bankers and SIDBI on the situation in the microfinance sector in Andhra Pradesh and other states.

The bankers informed the RBI that collections by MFIs in Andhra Pradesh have deteriorated considerably and there were some incipient signs of the problem spreading to other states.

"All of us understand the importance of the MFI sector and do not want it to fail. Hence, we met today for finding ways (to resolve the issue)," IBA Chief Executive K Ramakrishnan told PTI after the meeting at Mint Road.

Although there has been no default in repayment obligations to the banks by the MFIs till November 2010, the release said, "going forward this (repayment) may be a matter of concern."

The problems in the microfinance sector erupted after the Andhra Government imposed restrictions on activities of the MFIs following spate of suicide by harried borrowers.

At the today's meeting, the banks urged the RBI to work out interim arrangement to deal with the problem. They suggested that the banks be allowed to reschedule exposures to MFIs subject to the condition that such institutions reduce exposure and scale down growth projections.

Besides, the lenders also demanded regulatory concessions for averting any crisis and preventing contagion spreading to other states.

"The general view of the banks was that...some interim measures may be required to address the gap between the recoveries by the MFI and their payment commitments to banks," the release said.

Ramakrishnan added that a proposal to restructure MFI accounts on the lines of the concession given to the crisis- hit aviation sector has already been submitted from the bankers' side.

As regards the structural issues of the micro-finance sector, the release said, it would be addressed by the Malegam Committee in due course of time.