RBI/2010-11/376
DBOD.BP.BC.No. 74 /21.04.132/2010-11
January 19, 2011
The Chairman and
Managing Directors /
Chief Executive Officers of
All Scheduled Commercial Banks
(Excluding RRBs & LABs)
Dear Sir,
Credit Support to Micro Finance Institutions
(MFIs)
The Reserve Bank of India had held discussions with select banks on December
22, 2010 to get an assessment regarding the ground level situation in the
microfinance sector in Andhra Pradesh and other States and the need for any
interim measures. The banks informed that collections by MFIs in Andhra Pradesh
had deteriorated considerably and there were some incipient signs of contagion
spreading to other States. Subsequently, IBA based on the feedback received by
them from banks had come up with a proposal that there is a need for extending
certain relaxations in the restructuring guidelines of RBI for the MFI sector.
They had observed that bank loans to MFIs are mostly unsecured but to avail of
the regulatory asset classification benefits under the present restructuring
guidelines of RBI, the accounts have to be fully secured. As far as the banks’
exposures to MFIs were concerned, the banks stressed on the need to work out an
interim arrangement involving, inter alia, rescheduling of exposures to MFIs
subject to certain covenants such as MFIs agreeing to reduce their leverage and
growth projections.
- In terms of paragraph 6.2.2 of our circular
DBOD.No.BP.BC.No.37/21.04.132/2008-09 dated August 27, 2008 on ‘Prudential
Guidelines on Restructuring of Advances by Banks’, special regulatory asset
classification benefits are available to restructured accounts provided,
inter alia, the dues to the banks are fully secured. Considering the fact
that the current problems afflicting the Micro Finance Institutions (MFIs)
sector are not necessarily on account of any credit weakness per-se but are
mainly due to environmental factors, it has been decided that the special
regulatory asset classification benefit could be extended to restructured
MFI accounts, which are standard at the time of restructuring, even if they
are not fully secured. This relaxation is granted purely as a temporary
measure and would be applicable to Standard MFI accounts restructured by
banks up to March 31, 2011. The other conditions specified in the above
mentioned circular for getting the special asset classification benefits
would remain unchanged. It is advised that a consortium approach for
restructuring may be preferred and all the banks financing a MFI unit should
come together and decide on the course of action to be pursued for that
unit.
- The above measure is likely to impart some liquidity support to MFIs and
facilitate a ‘holding on’ operation for some time till the Malegam Committee
submits its report and measures are taken to bring about long term and
structural changes in the functioning of MFIs. Banks are advised that they
should endeavour to recycle the collections to MFIs so as to ensure that the
intended ‘holding on’ operation is successful.
Yours faithfully,
(B. Mahapatra)
Chief General Manager-in-Charge