India’s microfinance industry gets some relief

Monday, August 20, 2012

It’s a period in history that India’s microfinance industry would probably rather forget: In late 2010, more than 200 poor residents of the Andhra Pradesh state committed suicide allegedly due to excessive pressure from microcreditors for debt repayments. Backlash against microfinance institutions not just in the state but the whole of India followed.

Today, the Indian microfinance industry continues to struggle, particularly with liquidity as many local commercial banks have shut their doors to MFIs following the scandal. The Asian Development Bank has come forward to help ease the sector’s pain, in perhaps the biggest single facility for microfinance guarantees ever offered by a bank.

In a deal announced Aug. 13, ADB tapped IFMR Capital — an India-based nonbanking financial firm helping institutions catering to poor households gain access to capital markets — to structure a partial guarantee program for loans to India’s MFIs. Ratnakar Bank will serve as the domestic banking partner for the facility and will extend rupee loans with partial guarantees to MFIs. According to a company blog post, ADB has allocated 5 billion Indian rupees ($90.2 million) to underwrite partial guarantees under the partnership.

Partial guarantees aim to cover losses due to loan defaults. IFMR said in its blog post that the facility is part of the broader Microfinance Risk Participation Program, under which ADB pledges up to 50 percent partial guarantee. In other words, if an MFI that qualifies under the program takes out a $10 million loan from a commercial bank in India, ADB pays $5 million in case the borrower fails to pay up.

This move by ADB comes with considerable benefits.

“I think it means the liquidity crunch that has prevented microfinance institutions in India from getting capital to grow, thatshould be partly alleviated,” said Camilla Nestor, vice president of financial services at the Grameen Foundation. “There should be a little bit more capital flowing into the sector. That’s a big plus. It gets the banks re-engaged as well in microfinance.”

Source: Devex (link opens in a new window)