Mumbai: Microfinance institutions (MFIs), which are battling a crisis in Andhra Pradesh following a controversial state law, plan to seek a freeze of up to one-year from banks to meet their payment obligations.
The Microfinance Institutions Network (Mfin), an association of such firms, plans to approach the bankers’ lobby, the Indian Banks’ Association (IBA), with this proposal soon.
“What we are seeking is an up to one-year moratorium period for MFIs operating in Andhra Pradesh and a lesser period for those operating outside the state. Once the moratorium is in place, the amount recovered from the state can be used for further lending to clients,” Vijay Mahajan, president of Mfin, said.
A moratorium is a sort of holiday on repayment for a specific period. Typically, banks allow a moratorium to troubled borrowers with an understanding that repayments will be resumed at a later stage.
The Mfin move assumes significance in the context of the Reserve Bank of India (RBI) directing IBA last week to chalk out a restructuring plan to support the beleaguered microfinance industry.
A senior IBA official said the industry lobby has received suggestions from four-five banks on the matter and is likely to recommend some “regulatory dispensation” for banks to restructure loans to MFIs without classifying the loans as non-performing assets (NPAs). Once an asset is classified as an NPA, banks need to set aside money for making provisions against these. This dents their profitability.
MFIs borrow from banks and lend the money to poor people at a higher rate.
“Banks are likely to do the restructuring on a case-to-case basis and will seek a dispensation from RBI to do it without classifying it as an NPA,” the IBA official said on condition of anonymity.
“MFIs may be allowed not to pay the principal for a specified period on a case to case basis, but has to pay the interest component,” the official said.
MFIs, which are in the business of giving tiny loans to low-income people, plunged into a crisis in mid-October when the Andhra Pradesh government issued an ordinance to control the coercive practices allegedly used by some of the MFIs.
The new law, which prohibits MFIs from collecting repayments on a weekly basis and makes it compulsory for microlenders to seek government approval to extend a second loan to the borrower, has badly hit their operations.
Microlenders in Andhra Pradesh have seen their collections dropping to 10-20% in the state and have nearly stopped fresh lending to borrowers as the government is taking time to approve the proposals. Andhra Pradesh accounts for more than one-quarter of the business of the Indian microlending industry.
Senior officials in MFIs said a moratorium could help the firms tide over the crisis.
“In Andhra Pradesh, MFIs are not getting repayment from their clients. It is difficult for them to repay (banks in turn). Therefore, some kind of moratorium will be helpful,” Samit Ghosh, managing director of Ujjivan Financial Services Pvt. Ltd, said.
Due to the uncertainty in the sector, banks have stopped giving fresh loans to MFIs, and at least one bank—Yes Bank Ltd—has asked microlenders to return the money.
Indian banks have a combined exposure of around Rs 14,000 crore to MFIs as on 31 March, according to the National Bank for Agriculture and Rural Development.
“Moratorium could be a part of the restructuring, if RBI allows us to do it without classifying it as NPAs,” a senior official of Union Bank of India said, asking not to be identified.
On 22 December, senior bankers met RBI’s top brass to discuss the impact of Andhra Pradesh law on the MFI industry. “As far as at banks’ exposures to MFIs were concerned, the MFIs had so far been able to meet their repayment obligations to the banks till November 2010. However, going forward, this may be a matter of concern,” an RBI release said after the bankers meeting.
Analysts said a restructuring will help the ailing industry to recover from the current crisis and improve cash flows.
“If not in this quarter, in the next quarter there can be some NPAs coming from the microfinance industry as banks have to classify the defaults as bad loans. Within a year, most of the companies will be able to improve their cash flows,” Vaibhav Agarwal, vice-president of research at Angel Broking Ltd, said.