Microfinance sector seeks RBI’s additional support to combat COVID-19 second wave

New Delhi: The microfinance industry has sought additional support, including an extension of the emergency credit line, from the Reserve Bank of India to combat the challenges arising out of the second COVID-19 wave.

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

Just when we were coming out of the effects of the first wave of the pandemic, the second wave has descended on us with a vengeance.

RBI timely intervention for the sector and its recent announcement of special long-term repo operations (SLTRO) of Rs 10,000 crore for Small Finance Banks and categorization of lending by SFBs to MFIs under Priority Sector Lending has been of immense help,” Sa-Dhan executive director P Satish said.

Last week, the RBI has decided to conduct SLTRO of Rs 10,000 crore at the repo rate for the small finance banks (SFBs), to be deployed for fresh lending of up to Rs 10 lakh per borrower to provide further support to small business units, micro and small industries, and other unorganised sector entities adversely affected during the current wave of the pandemic.

In view of the fresh challenges brought on by the pandemic and to address the emergent liquidity position of smaller microfinance institutions (MFIs), SFBs 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 priority sector lending. The RBI extended this up to March 31, 2022.

To charter through these difficult times, the industry need further extended support from the RBI, Satish said, adding, MFIs may be supported with an emergency credit line of up to 25 per cent of their outstanding with their lending banks.

MFIs would be able to mobilise Rs 15,000 crore if this is implemented and this may help in the immediate flow of funds to MFIs from banks, it said.

It also sought a special liquidity facility of at least Rs 15,000 crore through NABARD and SIDBI to MFIs. At least 40 per cent of funds under this may be earmarked for MFIs with a portfolio below Rs 500 crore.

The lending from banks to MFIs under on-tap TLTRO may kindly be given a push, it said, adding the RBI may consider Rs 25,000 crore under this funding window that can help MFIs in coping with their liquidity and funding challenges.

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

It also made a case for the removal of the present base rate linked interest rate cap with margin cap based interest rate with an overall cap of 26 per cent or inclusion of a base rate of SFBs in the overall base rate calculation.