Mumbai: Indian banks on Friday decided to resume lending to the beleaguered micro finance institutions or MFIs in Andhra Pradesh to support the sector tide over the current crisis caused due to a recent state law. Banks will extend further loans to micro lending firms through groups after assessing the business situation and cash flows of individual companies.

Banks, through Indian Banks Association (IBA), will also seek the permission of the Reserve Bank of India (RBI) to allow a one-time restructuring of MFI loans, without classifying the loans as substandard assets.

In a meeting of IBA on Friday, the industry body of banks, lenders have also decided to consider extending a moratorium on MFI loans once the RBI allows the proposal, the official said.

The respective bank group will decide the period of restructuring on a case-to-case basis, the official said.

“IBA will be recommending to RBI to allow a dispensation to do a one time restructuring of MFIs without classifying the loans as non-perfoming assets,” the official, who did not want to be named, said.

Typically, banks have to set aside 20% of the loans as provision in case if they restructure a account that is not a bad loan already.

Recently, the RBI had met chiefs of leading banks to discuss the MFI issue and asked IBA to prepare a restructuring plan for the sector. The IBA will soon submit its recommendations.

The Rs20,000 crore microlending industry plunged into a crisis after the Andhra Pradesh government came with a law to restrict the operations of microlenders and control the coercive practices allegedly used by some of them.

Due to the uncertainty, banks had stopped lending to the sector. The RBI, on its part, appointed a committee headed by chartered accountant Y H Malegam to review the regulations on the sector. The committee will submit its report in Janury.

Indian banks have a combined exposure of around Rs 14,000 crore to MFIs as on 31 March, according to National Bank for Agriculture and Rural Development.

dinesh.n@livemint.com