Microfinance institutions (MFIs) will be allowed to draw external commercial borrowings of up to $10 million, according to the Reserve Bank of India Deputy Governor, Mr H. R. Khan.

Speaking at the valedictory session of the National Microfinance Summit-2011, he said that the RBI would come out with a notification on this.

But MFIs would need to come out with a proper hedging strategy, given the times that we are in, Mr Khan said.

The move is expected to address the issue of liquidity that the microfinance sector has been witnessing in recent times, according to leading players in the industry.

The regulator also sought to ‘correct' an anomaly in the extant rules that allowed only NGO MFIs to leverage the ECB window.

The maximum limit was fixed at $5 million, too. MFIs have long been requesting the Reserve Bank for a review of the situation.

By making it applicable for MFIs of ‘all hues,' the regulator had sought to meet the industry expectations, Mr Khan said.

Liquidity issue

Referring to the liquidity issue, Mr Khan described how ‘source of funds' had become a sticking point with the industry.

Agreeing that some ‘green shoots' were visible thanks to initiatives such as corporate debt restructuring, he said that the industry should now look at sourcing long-term finance. This would also help bring down the cost of raising funds.

This has been emphasised by the Malegam Committee report as well. Mr Khan advised MFIs to connect with the Working Group dealing with specific issues of the sector set up by the Reserve Bank as announced in the October credit policy.

He also emphasised the need for the MFI sector to be increasingly driven by its own CSR initiative – Credibility, Sustainability and Responsibility.

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