Microfinance institutions ask RBI for exemption from overdraft restrictions

Chennai: Microfinance institutions (MFIs) have requested the Reserve Bank of India (RBI) to exempt them from restrictions on current account and overdraft facility extended by banks as the new guidelines would create operational difficulties for them.

The RBI had restricted banks from opening current accounts for customers who have availed cash credit or overdraft facilities. Instead all transactions should be routed through a Cash Credit (CC) or Overdraft (OD) account.

"In the current scenario, when borrowers require urgent credit to restart their lives, implementation of the revised guidelines will result in numerous difficulties and operational issues for the microfinance sector,” said P Satish, executive director of Sa-Dhan.

The sector has requested RBI to review the circular and exempt NBFC-MFIs as well as non-NBFC-MFIs from this circular on the restriction of opening and operation of current accounts.

According to Sa-Dhan, MFIs have various current accounts with banks based on the location of their branches. Since demonetization all loan disbursements of MFIs are being credited to the bank accounts of their borrowers. Many MFIs also have ECS mandates for loan collections. Such banks may or may not have CC/OD facilities extended to such MFIs. Pursuant to the circular, these current accounts will need to be closed.

Though loan disbursements of MFIs are through bank accounts of borrowers, a large part of collections are still in cash. MFIs require multiple current accounts in multiple banks for their cash management requirements.

In case of MFIs which avail term loans from banks for on-lending, the requirement is that the lending bank will remit funds directly to the supplier of goods and services. This provision is a little inscrutable in case of MFIs as the loan availed is for further lending to the ultimate borrowers.

If all transactions are only to be routed through a particular bank, there would be no flexibility or back up available in case of any unforeseen issues with that particular bank or freeze on transactions with that bank.

If a particular MFI does not have more than 10 per cent exposure to any bank, it is not clear as to how the banking transaction requirements of that MFI would be met, said Sa-Dhan. It is not clear if an MFI having more than 10 per cent of exposure to a bank can do debit transactions from its collection account.