In a move that will bring cheer to the cash starved micro-finance sector, the

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Reserve Bank of India (RBI) on Monday allowed micro-finance institutions (MFIs) to raise up to $10 million each (around Rs 53 crore) a year through external commercial borrowings (ECBs).

RBI said in a circular that the money so raised would have to be invested in permitted end-uses. The facility has been placed under the automatic route.

So far only MFIs that are non-government organisations (NGOs) were allowed to raise up to $5 million a year in ECBs. The new norms raise this limit also to $10 million. MFIs registered as non- banking financial companies (NB­FCs) or as societies, trusts and co-operatives and engaged in micro-finance can raise ECBs.

The new norms come into immediate effect and will be reviewed after a year.

Alok Prasad, CEO of the Micro Finance Institutions Network, the industry lobby representing 48 MFIs that are NBFCs, said, “We were in dialogue with RBI for six months to correct the policy anomaly which allowed the ECB facility only to MFIs that are NGOs, which do only about 10 per cent of all micro-finance lending.” MFIs that are NBFCs do 90 per cent of the business and need this avenue of raising funds.

He called the $10 million cap reasonable. A large number of foreign investors who wanted a slice of India’s micro-finance business could not do so because of the earlier restrictions. “The ECB window would allow us to raise cheaper funds from abroad,” he said. According to him, MFIs now borrow at 13-14 per cent, whereas overseas funds, excluding the hedging cost, are available at 4-5 per cent.

The MFI industry has been struggling for funds since October last year when Andhra Pradesh imposed stringent regulations after charges of overcharging and using force to recover loans.

Banks also pulled back from lending to MFIs, starving them of cash. “NBFCs that are MFIs will be permitted to avail of ECBs from multilateral institutions, such as IFC, ADB, regional financial institutions/international banks/ foreign equity holders and overseas organisations,” said RBI. A few days ago, RBI deputy governor H R Khan had said that micro- lenders would be allowed to borrow from overseas markets.