A liquidity crunch has hit several microfinance institutions with the flow of funds 'temporarily' drying up after the largest MFI lender, ICICI Bank, halted payments in early January following concerns raised by the Reserve Bank of India about adherence to customer identification norms and record-keeping in the 'partnership model' of micro lending.
M Udaia Kumar, managing director, Share Microfin, said, "The
ICICI Bank stopped disbursing loans to partner MFIs from January 1. The flow of funds has come to a standstill affecting over 100 MFIs."
In a partnership model, loans given through MFIs are shown in the bank books, but the MFIs also share a part of the credit risk, say up to 10 per cent.
The central bank has said it has no problems with the partnership model but wants the banks to adhere to the customer identification (know your customer) norms. It wants the banks to monitor record-keeping and management information systems in microfinance lending and not leave such functions to the MFIs.
CS Murthy, chief general manager-in-charge, Reserve Bank of India said, "For one bank, we were concerned about how exposure has been documented in their books and other paperwork. Three days ago, we received a letter from the bank explaining its stance and providing some information and we are looking into it."
A large part of the ICICI Bank's microfinance exposure is through the partnership model. This model has been adopted by banks because the low capital base of MFIs restricts the extent of direct term lending to MFIs for onlending to small borrowers. The partnership