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For understanding, Banks join to audit books of microfinance institutions
November, 26th 2010

Banks that lend to microfinance institutions (MFIs) have formed a consortium and are auditing the books of key firms to get a clear understanding of industry practices.

The initiative is being led by the Small Industries Development Bank of India (Sidbi), according to Chandra Shekhar Ghosh, chairman and managing director of Bandhan Financial Services Pvt. Ltd, India's fourth largest MFI by loan portfolio.

Kolkata-based Bandhan's books are currently being audited. "I know of such audits being conducted at three-four other MFIs," Ghosh said. "We welcome the move."

It is not new for banks to examine the books of MFIs to which they lend, but this is the first time they are sharing intelligence among themselves, and trying to understand how the industry works, he added.

Though not triggered by the ongoing crisis, the audit is aimed at understanding if the quality of assets remained sound, and if MFIs had proper systems for loan disbursement and recovery, according to a banker, who is part of the lenders' forum conducting the audit. He did not wish to be identified.

Commercial banks made fresh loans to the tune of at least '7,782.36 to MFIs in fiscal 2010, and their collective outstanding loans to the industry were at '9,940 crore at the end of March, according to a recently released report by Access Development Services, a not-for-profit organization that offers consulting services to MFIs.

That apart, Sidbi alone had a loan exposure of '3,808.2 crore as of 31 March, having made fresh loans of '2,665.75 crore to MFIs in fiscal 2009-10, according to Access.

The figures are based on provisional data provided by the National Bank for Agriculture and Rural Development (Nabard), Access says, and the actual exposure of Indian financial institutions, which includes regional rural banks and some banks that didn't report figures, could approach '15,000 crore.

The audit could be expanded, and the books of 10-12 MFIs be examined, according to the banker cited above. He said audits at two leading firms--SKS Microfinance Ltd and Equitas Microfinance India Pvt. Ltd--had already been concluded. Spokespersons for SKS and Equitas, however, said they were not aware of any such audit.

Officals from twelve private sector and foreign banks that lend to MFIs had met to give feedback on the MFI industry for the Access report. Of them, six had a positive outlook on the sector, while three said they were to "exercise caution" and closely watch "emerging developments", and the rest said their outlook was "not positive".

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