Microfinance companies in the country should work towards exploring other funding opportunities as investors and lenders will be fairweather friends. The reduced equity flow and liquidity constraints stemming from banks’ reluctance to increase exposure in an uncertain market led to contraction of business in many MFIs, according to Microfinance India report

“Their investments do not indicate a commitment to the investee institution but to the short-term outlook for the safety of their investment. MFIs have to work on diversifying sources of funding and accessing alternative avenues and instruments to reduce the credit availability risk,” the report says.

The investment amounts were last fiscal were quite small so much so that the total investments (other than IFC) stood less than Rs 280 illion following the Andhra Pradesh crisis. The last equity deal to take place before the Andhra Pradesh Crisis started was valued at Rs 210 million, almost equaling total investments following the onset of the crisis.

Infact, most MFIs as an attempt for survival have already explored alternatives to traditional loans and have started using

non-convertible debentures, letters of credit and securitisation of loans and mezannine debt. The flip side could also be that as more banks turn toward securitization to meet capital requirements, MFIs have lost their bargaining power. Also, few companies are availing quasi-equity either in the form of subordinated debt of long duration or by issue of preference shares.

The report further says that instead of being protected by their priority Sector Lending (PSL) targets, banks view them as having a much higher risk. The outstanding bank loans to MFIs reached a level of Rs. 126.8 billion marking a drop of Rs. 13.3 billion when compared with the previous year. SIDBI Small Industries Development Bank of India has also reduced its loan disbursements to MFIs, from Rs. 26.65 billion in 2009-10 to Rs. 8.4 billion in 2010-11, the report cites.

This report ‘State of the sector – 2011’ was developed by Access, a non-profit organisation that looks at incubating institutions for self sustainability and authored by N Srnivasan.

Meanwhile, there has been a complete freeze on PE investments by microfinance investors after October 2010. This trend was described by Mark Stoleson, CEO of Legatum, an investment firm, in the report as, “Microfinance lending in FY 2011 went down dramatically in six months but no one has stepped in. The volume of capital that is required is huge and unless the AP Act is resolved, no investor in their right mind will invest in microfinance because they know they

will be subjected to the vagaries of the state government’s action.

Nevertheless, the sector on the other hand has seen a positive growth in the current level of business both in terms of volumes and in client numbers despite the crisis that it stumbled upon in Andhra Pradesh.

In the past few years, the microfinance sector comprising SHG – bank linkage programs and MFIs had registered a 100 per cent growth in customer base and a 240 per cent growth in the loan portfolio.

Notwithstanding this high rate of growth the sector is not possibly in a position to reach the ambitious projections held out earlier that the sector would be covering 440 million clients with a loan portfolio of `2,000 billion. “But the current level of business both in terms of volumes and in client numbers is impressive. However, the quality of growth is being questioned with no satisfactory answers forthcoming,” the report says.