Unfortunately my post today reflects some updated info we've been getting from the field on one major source of lending funds that's recently dried up.
If you've been reading my microfinance posts you may have caught one from last week when I mentioned ICICI's partnership lending program, where they make on-lending funds available to MFIs and allow them to take the money and go off and create loans, which then sit on ICICI's books. The MFI in effect, acts like a service company, its core competency being customer management, not risk management.
Well unfortunately, recent feedback we've been hearing from MFIs suggests that ICICI has all but stopped this program (and the massive amounts of cash disbursal that it entails) just as the financial year is ending. Whether this has something to do with government pressure following last year's Microfinance crises in AP (more on this in a later post) or just an accounting move by the bank to rebalance its various risk portfolios prior to closing its books, the cause is not yet clear.
I do hear from some Indian private equity veterans that this type of year-end manuvear is not new for ICICI. The downside is that MFIs who are growing like wildfire and have clients coming back looking for the next loans are all of a sudden starved for cash. Not only this, but since many MFIs had come to rely on the ICICI program they had not been developing relationships with other banks. Sudden demand in the market from a handful of new players puts an onus on other banks (not ICICI) to keep lending and boosts the cost of borrowing for these shops almost overnight. I believe that fact coupled with the recent inflationary pressures in India will have a significant effect on the interest rates these MFIs get stuck with if they take on more term loans right now. Two year rates for these groups are typically about 10%. I wouldn't be surprised to see that number go up 100 basis points (1%) for loans initiated by these groups next quarter.
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Posted by: bee | March 17, 2007 at 11:22 AM