Narayanan V
External commercial borrowings (ECB) of micro finance companies witnessed a three-fold jump to touch $53 million during the current financial year, even as tight liquidity in the domestic market continues to hurt the industry, particularly small and medium institutions.
Traditionally, banks and money-market instruments are the major sources of borrowing for non-banking financial companies/micro finance institutions (NBFC-MFIs), while some large and well-managed MFIs occasionally tap overseas borrowings through non-convertible debentures (NCDs) and ECBs.
But small and medium MFIs that count NBFCs as their major source of borrowing have been hit hard by the liquidity shortfall with banks and mutual funds having reduced their exposure to the sector ever since the IL&FS crisis broke out.
“Banks’ lending to NBFC-MFIs qualifies for priority sector lending; hence, the larger MFIs are in a position to raise debt, but small- and medium-sized MFIs are affected with this structural shift,” said Milind Nare, Chief Financial Officer, Arohan Financial Services.
The Kolkata-based NBFC-MFI raised $15 million through ECB during the current financial year, and expects its overseas borrowing to go up further if the liquidity crisis in the domestic market persists.
Realigns lending strategy
Although mutual funds have not reduced their exposure to NBFCs on a great scale, it had realigned its lending strategy to focus on less-risky or larger lending companies backed by PSUs or a strong corporate brand.
“The appetite of mutual funds for instruments floated by NBFCs has reduced, forcing them to approach traditional banks for credit limits,” said Nare.
Small and medium MFIs, which offer financial support to low-income households in rural hinterlands, are also seeing their borrowing costs going up due to limited liquidity in the market.
“Earlier, small MFIs were borrowing at 13.5-14 per cent, but now, in some cases, it has even touched 16 per cent,” said an industry veteran.
While leading MFIs agree that the cost of borrowing has gone up, they also add that the IL&FS crisis had no impact on the industry, which is protected by a strong asset-liability management (ALM) mechanism.
“Small MFIs dependent on NBFC funding are affected to some extent, but they were able to manage the liquidity crisis by securitising their portfolios,” said Udaya Kumar Hebbar, MD and CEO, Credit Access Grameen.
“Some of the MFI lenders also provided wholesale lending to smaller MFIs during the crisis,” added Hebbar.
Positive ALM mismatch
Credit Access Grameen, which has made the highest ECB borrowing of $19 million, said it did not face any liquidity crunch due to its positive ALM mismatch.
“Overseas borrowing through NCDs and ECBs has been part of our diversification strategy since 2012-13, and it contributes close to 30 per cent of our overall borrowings,” said Hebbar.