RBI urges banks to keep lending to microfinance firms

Fifteen-year-old Saira (C) cuts shirt threads inside a garment factory in Mumbai August 3, 2010. REUTERS/Danish Siddiqui/Files

MUMBAI (Reuters) - The Reserve Bank of India urged commercial banks to continue lending to the microfinance sector, after a crackdown on their activities by Andhra Pradesh government curbed collections and new business.

A delegation of banks told the Reserve Bank of India (RBI) on Wednesday that collections in Andhra Pradesh, the hub of the industry, had suffered significantly since October when the state rules came into effect, and warned that the problem showed signs of spreading to other states, an RBI statement said.

The RBI formed a panel in late October in response to the Andhra Pradesh rules. The panel is expected to submit its recommendations by mid-January.

“The banks stressed on the need to work out an interim arrangement involving ... rescheduling of exposures to MFIs (microfinance institutions) subject to certain covenants such as MFIs agreeing to reduce their leverage and growth projections,” according to the RBI statement.

The RBI urged banks to continue lending to the lenders to the poor.

“The RBI sensitized the banks to the need to maintain funding lines to MFIs on merits to prevent contagion,” it said in a statement issued late on Wednesday.

On Monday, Grameen Capital India, an affiliate of the Grameen Foundation, which was co-founded by industry pioneer Muhammad Yunus, announced an $8 million credit guarantee on funds provided to eligible microfinance lenders.

Shares in SKS MicrofinanceSKSM.BO, the country's only listed microfinance firm, touched new lows this week and have fallen by more than half from their peak after a popular August initial public offering.

Reporting by Arjun Kashyap, Editing by Tony Munroe