Microfin cos may see credit crunch

Microfinance companies are facing the threat of a funding squeeze as banks and non-bank lenders slow lending to them.

- Gopika Gopakumar &Anshika Kayastha

A recent move by the Karnataka government plan to curb aggressive recovery practices has added to the uncertainty.

According to industry experts, downgrades of three major microlenders only increase the risk of further defaults and rating cuts.

"Disbursements from banks have slowed down and they're not giving fresh loans to MFIS (microfinance institutions)," said Jinay Gala, director, India Ratings and Research Ltd.

"This funding tightness could play out for MFIs wherein banks could incrementally roll over their existing debt but giving them new credit lines would be a challenge." Many microlenders could see their book shrink because lending has slowed and incremental collections are being used to build on-balance sheet liquidity, Gala said.

Last Monday, Icra Ltd and Care Ratings Ltd downgraded Spandana Sphoorthy Financial Ltd after it announced dismal results owing to rising stress in the MFI portfolio. Spandana reported net loss of ₹601 crore and write-off of ₹700 crore during the period.