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Grameen extends guarantee for MFIs to ensure bank finance……..Aveek Datta & Dinesh Unnikrishnan
Grameen Foundation, a not-for-profit organization based in the US, and two of its affiliates have set up an $8 million (Rs.36.2 crore) fund to offer guarantees on behalf of microfinance institutions (MFIs) looking for bank funding. The objective is to instil confidence in Indian banks to lend to MFIs.
Banks have stopped funding MFIs, particularly those that are operating in Andhra Pradesh, as their collection rate has dropped dramatically following an ordinance passed by the state government in October. The ordinance has now become a law with the government passing it early last week. This prohibits MFIs from charging interest that exceeds repayment of principal and resorting to coercive loan recovery practices.
“The group will make available $8 million in guarantee funds that it expects to generate a minimum of $16 million in local-currency financing to poverty-focused MFIs from local banks,” said a statement issued by Grameen Foundation, along with its affiliates Grameen Capital India and Grameen-Jameel Microfinance Ltd on Monday.
However, both bankers and some micro credit lenders expressed doubt whether banks would accept such collateral to lend to MFIs.
“We need to see what is the efficacy of this guarantee and whether we are allowed to lend against this. This may help in giving comfort to MFIs,” said M. Narendra, chairman and managing director of Indian Overseas Bank. “At the moment, our focus is to directly lend more to self-help groups, which operate in compliance with the rules. Even for MFIs, if they come with genuine proposals and do not opt for aggressive methods for loan recovery, banks will look into their proposal.”
“I am not sure how the Grameen guarantee fund will work, but some other international institutions have also made such guarantees available to little benefit. Some of the guarantees are only for loans taken from international banks that have an overseas branch network. These banks, however, are not too keen to lend to MFIs,” said S.V. Raja Vaidyanathan, chairman and managing director of Asirvad Microfinance Pvt. Ltd, a Chennai-based MFI. Asirvad, which has a portfolio size of Rs.110 crore, reduced its interest rate on 22 November to 28%, from 33% earlier.
While the Grameen Foundation provides financing, technology support and management strategies for microcredit lenders across the world, Grameen Capital India is a microfinance-focused financial intermediary.
Grameen Jameel, a joint venture between Grameen Foundation and ALJ Foundation, a subsidiary of the Abdul Latif Jameel Group, provides financial support and technical assistance to MFIs in West Asia and North Africa.
Grameen Capital India is a collaboration involving Grameen Foundation, IFMR Trust and Citicorp Finance (India) Ltd.
Muhammad Yunus, a pioneer in the field of microfinance and a Nobel laureate, serves as director emeritus of Grameen Foundation, which aims to globally replicate the poverty alleviation model adopted by his Grameen Bank in Bangladesh.
“Due to the developments in Andhra Pradesh, bank funding for MFIs in other regions has also suffered. The guarantee should hopefully thaw the frozen limits,” said Royston Braganza, CEO of Grameen Capital India.
Grameen will explore the possibility of coming on board as a co-guarantor with other institutions looking to offer such a facility for MFIs, Braganza said. Discussion with a few microfinanciers who were keen on availing such a facility had already begun, Braganza said. “We will look at whoever approaches us, especially the tier II and III institutions who are?in?critical?need?of?liquidity.”
A person with direct knowledge of the development said that Allahabad-based MFI, Sonata Finance Pvt. Ltd, and Bangalore-based Grameen Koota were some of the MFIs that have expressed their keenness to avail such a guarantee that can help them secure bank loans. He did not want to be identified.
Braganza said that Grameen Capital, the entity through which the guarantee fund would be made available to MFIs in India, would be charging a “guarantee fee” for the facility. The industry benchmark for such a fee is 3-5% of the fund guaranteed, according to Braganza.
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