Good news for smaller NBFC-MFIs as NABARD sets easier terms for Rs 5,000 crore refinance scheme

The National Bank for Agriculture and Rural Development (NABARD) has set relaxed eligibility criteria for smaller microlenders to avail a dedicated refinance support scheme. The Reserve Bank of India (RBI) had provided Rs 5,000 crore to NABARD under the Additional Special Liquidity Facility (ASLF) to offer refinance support to smaller firms.

Microfinance institutions (MFIs) are companies that typically source funds from banks at 12-15 percent and lend to customers at 20-23 percent.

According to the details announced by NABARD, smaller non-banking finance companies (NBFCs) having asset size less than Rs 500 crore and NBFC-MFIs are eligible to avail the refinance scheme. The loans will have an 18 months repayment tenure and interest rate will be charged 300 basis points above the base rate with applicable risk premium, NABARD said.

“The NABARD scheme is meant for the smaller MFIs. We are broadly happy with the relaxed conditions set by NABARD to avail this scheme,” said P Satish, Executive Director at Sa-Dhan, an industry body of microlenders.

NABARD hasn’t stipulated rating for MFIs, but they need to have grading not less than three notches below the top grading awarded by a rating agency. The grading should have a least six months of residual validity.

Further, the residual period of the portfolio against which the refinance is sought should be more than 18 months, NABARD said. To become eligible, MFIs should have net non-performing assets (NPAs) less than 4 percent and minimum CRAR (capital adequacy) of 15 percent as on March 30.

Also, the NBFC-MFIs should not have accumulated losses and should be in profit at least in three of the four financial years between 2016-17 and 2019-20, NABARD said.

A refinance scheme dedicated for smaller NBFCs and NBFC-MFIs assumes significance given that the benefit of most liquidity schemes have gone to bigger NBFCs with top ratings. This is because of the high risk aversion of commercial banks. Due to COVID-19, banks have significantly cut down lending to smaller firms fearing future defaults.

Since March, the RBI has infused significant liquidity (approximately Rs 8-9 lakh crore) in the banking system. The central bank has carried out multiple rounds of TLTROs (targeted long-term liquidity operations) and special liquidity schemes, besides cutting lending rates by a cumulative 250 bps since February 2019.

Early this week, Moneycontrol reported that repayment rates or collection rates of MFIs have returned to 80-85 percent in September compared with 90-95 percent pre-COVID.

Similarly, August-September saw an uptick in disbursement rates as well in the microlending industry. On an average, microlenders used to disburse Rs 17,000 to Rs 20,000 crore. After falling to extremely low levels in the March quarter, monthly average disbursement levels have improved to around Rs 13,000 crore in September.

Based on Q1 FY21 data available for 52 NBFC MFI members, loan amount disbursed through cashless mode is 93 percent. About 52 percent members reported over 90 percent disbursements in cashless mode, while 42 percent members reported zero disbursements during the quarter.

According to the data, during Q1 FY21, NBFC-MFIs that are members of MFIN disbursed 2.04 lakh loans amounting to Rs 570 crore, a year-on-year drop of 97 percent in the number of loans and 96 percent in the amount disbursed.

Of this, top 10 MFIs in terms of loan amount disbursed accounted for 96 percent of NBFC-MFI industry disbursements in Q1 FY21, the data showed.

MFIs are institutions that borrow from banks and lend to small borrowers at a margin. The COVID lockdown had severely impacted the operations of these institutions as the collection process took a hit.