Morgan Stanley report lists exposure of some major banks to MFIs
Moneylife Digital Team 18 November 2010

Brokerage says banks purchasing loan pools from MFIs under pressure

The Andhra Pradesh government's ordinance to curb the activities of microfinance institutions (MFIs) has resulted in a wave of apprehension in the industry which is suffering from an acute financial crisis following a steep drop in repayments. Many MFIs have approached banks for emergency funds amounting to Rs10,000 crores, admitting to suffering a severe liquidity crisis.

Some of these issues were discussed even at the ongoing India Economic Summit in New Delhi, where experts in the field expressed worry about the impact that the state government's ordinance could have on the industry and especially on banks. Banks are the key funds source for MFIs, contributing almost 80% of the money lent to poor customers.

According to a Morgan Stanley Asia Pacific report, dated 16 November, many Indian banks have exposures worth billions of rupees to MFIs. It says the banks that purchase loan pools from MFIs would be under pressure, as the method exposes them to the borrowers, and a drop in repayment rates will subsequently affect them. Following are some of the figures: Yes Bank - Rs4.5 crores, Axis Bank - Rs13 crores, IndusInd Bank - Rs3.6 crores, ICICI Bank - Rs20 crores, HDFC Bank - Rs9 crores, Kotak Mahindra Bank - Rs1.3 crores, Bank of Baroda - Rs1.3 crores, Bank of India - Rs2.8 crores, State Bank of India - Rs8 crores, Corporation Bank - Rs6 crores, Punjab National Bank - Rs9 crores, Union Bank - Rs2 crores and Canara Bank - Rs3 crores.

Andhra Pradesh accounts for about 40% of the MFI loans in the country and has witnessed an alarming number of suicides by some debtors, due to harassment from MFI agents over repayment. The ordinance passed last month bans weekly collections from debtors. As a result repayment rates have dropped sharply in Hyderabad and even in Mumbai. This has affected even a couple of the top MFIs like SKS Microfinance and Asmitha.

Experts point out that many MFIs have run into trouble because of aggressive lending due to the focus on fast growth. They say MFIs should be more cautious in distributing loans to the poor with more stress on financial advice on the proper utility of such loans and evaluation of the client's repayment capacity.

As the situation gets more difficult, experts suggest that this could stretch for some time. As some banks in some state have stopped lending to MFIs, many are getting worried that the crisis could deepen and threaten a collapse.

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