Budget bolsters microfinance sector: CRISIL

Our Banking Bureau
02 March 2005

The Union Budget 2005-06 has several positives for the Indian microfinance sector. The initiatives to promote microfinance institutions (MFI) are a step in the right direction in channelling credit to the economically challenged. According to D Thyagarajan, director,-financial sector ratings, CRISIL, "The budget has several positive measures for the microfinance sector, which will enhance availability of equity and debt funding, strengthen bank-MFI relationships, and open up opportunities in micro-insurance"

One of the budget announcements was the expansion of the scope of the existing NABARD-managed Microfinance Development Fund to include equity contribution to MFIs. Simultaneously, the corpus is being increased from Rs1 billion to Rs2 billion. Access to equity capital has been one of the constraints facing many MFIs and non-governmental organisations involved in microfinance (NGO-MFIs). This measure is expected to address the problem to some extent.

Qualified NGO-MFIs may now be eligible to access external commercial borrowings (ECBs), enabling them to diversify their funding profile. This will restore the position that prevailed before September 2002, when the ECB window was closed for NGOs. Prior to that, a number of MFIs and NGO-MFIs in India were able to access attractive long-term subsidised funds from several social funds from the USA, Europe and other countries.

The reopening of this funding avenue will enable additional flow of funds to the sector, which critically needs low-cost funds to reach out to the economically challenged in rural and semi-urban areas. At the same time, this would allow in foreign microfinance investment funds that are keen to increase their exposure to Indian MFIs.

The move to allow commercial banks to appoint MFIs as "banking correspondents" is expected to strengthen bank-MFI relationships and enable MFIs to reach out to more rural people. Over the years, successful MFIs have demonstrated their appreciation of local dynamics, enabling them to offer customised services tailored to local needs. In a situation where an estimated 70 per cent of the rural poor do not have a bank account and 87 per cent have no access to credit from a formal source, this move will enhance the access of the rural populace to formal sources of finance.

While some large MFIs are already channelling insurance for their customers, the proposal to invite MFIs, NGO-MFIs and other entities as micro insurance agents will translate into benefits such as improving insurance density and mitigating credit risk for MFIs. Besides, it will enable MFIs and NGO-MFIs to generate fee income.