Core Insights - The article discusses the potential impact of a liquidity crunch similar to that of 2019 on money-market funds, suggesting they would be the first to be affected in such a scenario [1] Group 1 - A liquidity crunch could lead to significant disruptions in the financial markets, with money-market funds being particularly vulnerable [1] - The article highlights the interconnectedness of financial institutions and how a crisis in money-market funds could trigger broader economic issues [1] - Historical context is provided by referencing the 2019 liquidity crisis, illustrating the potential for similar events to recur [1]

Core Insights - The microfinance sector in India is facing significant stress, with many non-banking finance company-microfinance institutions (NBFC-MFIs) requiring urgent funding from banks and larger lenders to survive [1][13] - A notable contraction in India's micro-loan market has occurred, with a 17% year-on-year drop, leading to a decrease in active loans by nearly 20% [7][14] - Several microfinance firms, including VFS Capital, Navachetana Microfin Services, and Arth Finance, have defaulted on bank loans, indicating a broader liquidity crisis in the sector [2][12][14] Industry Overview - The microfinance sector began experiencing stress in April of the previous year, following a brief recovery from pandemic-related challenges [6][14] - As of the end of the September quarter, the ratio of portfolios at risk for over 180 days surged to 15.32%, reflecting a 9.71% increase year-on-year and a 2.89% increase sequentially [6][14] - The total micro-loan market size is now ₹3.46 lakh crore, with the number of active loans dropping to 132 million [7][14] Company-Specific Issues - VFS Capital has a cumulative exposure of ₹143 crore to five lenders and has failed to meet repayment commitments, with an overdue amount of ₹82 crore [8][14] - Navachetana Microfin Services has delayed debt servicing since April, with some loans already classified as non-performing assets (NPAs) [8][14] - Forensic audits have been suggested for restructuring bank accounts of these entities, which is mandatory for establishing the cause of defaults [10][14] Ratings and Financial Health - Acuite Ratings & Research downgraded Arth Finance's long-term rating to the default category, while Infomerics Ratings downgraded Inditrade Microfinance to junk status [11][14] - The financial health of mainstream lenders, including Bandhan Bank and IndusInd Bank, has also been impacted due to higher credit costs associated with microfinance portfolios [14] Recommendations and Future Outlook - Industry leaders suggest that financial institutions should adopt a more lenient approach to lending to smaller microfinance entities [12][14] - There is a proposal for a government guarantee program to facilitate lending to struggling microfinance institutions [12][14] - Janashree Microfin in Kerala has sought an extension to meet the minimum net-owned fund requirement, highlighting ongoing challenges in the sector [12][14]