Mumbai: The refusal of banks to lend to microfinance institutions (MFIs) because of uncertainty over recovery of loans from the sector may force some institutions to close down operations as early as 1 January, Vijay Mahajan, president of Microfinance Institutions Network (MFIN), an industry group, said.

Growing concern: Vijay Mahajan. Pradeep Gaur/Mint

Mahajan’s comments came even as some bankers said that they are contemplating asking MFIs to sign an agreement allowing banks to get an equity stake in microfinance companies in case of default in any new loans given to them.

Corporation Bank chairman and managing director, Ramnath Pradeep, said he has told his MFI clients that for any new lending, they will have to agree to the conversion of loans into equity in case of a default.

“They will have to convert equity at par, that is what I have told them, if they are ready to do that then there is no problem," he said.

At 600 crore, Corporation Bank’s exposure to MFIs is a “minuscule" part of its 69,000 crore total exposure, Pradeep said, while adding that there have been no new loans given to the sector in the last few weeks.

Mahajan said MFIs are ready to provide whatever collateral they are asked even if it is equity, but he said banks have not lent “a single rupee" to the sector in the last six weeks.

“Already, 90-95% of the 8,000 crore outstanding MFI loans in Andhra Pradesh are overdue. Right now companies are just collecting from other states and disbursing it in Andhra (Pradesh), but this cannot continue for long because some of the other states have not seen disbursals in the last two-three-four weeks and the borrowers there are wondering as to why companies are only collecting dues and not giving out loans," he said.

Mahajan added that if this continues the same way for a few more days, then defaults will start in other parts of the country too, because a lack of disbursements will push borrowers towards defaults.

“Already, we have seen some things happening in Madhya Pradesh, where a municipal councillor after losing an election urged borrowers not to pay back MFIs. Chandrababu Naidu is doing it on a much larger scale in Andhra Pradesh," he said, calling Naidu’s campaign “irresponsible".

Anil Girotra, executive director of Andhra Bank, confirmed that the bank has not lent to the sector recently.

“We hope that this issue will be resolved in the next few days. There are concerns about the high rates of interest charged by MFIs. Banks are also concerned about their money. Once these issues are resolved, the money flow to the sector will start again," he said.

Andhra Bank has lent 320 crore out of its total outstanding loans of 61,000 crore to MFIs. Girotra said his bank is also discussing ways of collateral like “credit enhancement and equity".

MFIN’s Mahajan said equity is only one of the few things MFIs have to give as collateral “because our only assets are the credit we have given, and we own very few fixed assets".