The 2010 microfinance crisis that originated in Andhra Pradesh may have claimed its first victim.
Trident Microfin Pvt. Ltd, one of the five microfinance institutions (MFIs) that was referred to the so-called corporate debt restructuring (CDR) cell after a controversial law by the Andhra Pradesh state government crippled the sector, is likely to shut its operations, after the company was removed by its lenders from the loan recast facility and denied additional funding.
The CDR cell, a forum of lenders, has asked a consortium of 21 banks to Trident to go for a one-time settlement of loans, under which Trident will pay 18% of the outstanding payment obligation, or about Rs.25 crore, to the lenders. This will, effectively, shut the company, since Trident has only Rs.18 crore worth of good assets. It has about Rs.112 crore of bad loans in Andhra Pradesh and has been unable to recover the money for the past three years.
The CDR mechanism offers stressed companies relaxed terms for loan repayment, including reduction in interest rate, repayment holiday and stretching of the loan tenure.
MFIs give small loans to low-income borrowers at 24-36% interest rate and primarily source money from commercial banks to do business.
Kishore Kumar Puli, managing director and chief executive officer of Trident, said the one-time settlement will take place only after the boards of the respective banks approve the proposal, since banks will have to write off 82% of loans to the company. Trident was admitted to the CDR cell, along with five other MFIs, in mid-2011 to restructure Rs.130 crore worth of loans.
The other firms whose loans were recast are Spandana Sphoorty Financial Ltd, Share Microfin Ltd, Asmitha Microfin Ltd and Bhartiya Samruddhi Finance Ltd, known as Basix.
Vijay Mahajan-promoted Basix, too, is facing the risk of closure as the company has failed to meet the promises made to the CDR lenders to bring in equity.
Basix, which went for a loan recast of Rs.650 crore in June 2012, couldn’t meet a 30 June deadline to raise equity because investors were unwilling to put in money in the firm.
The company has not exited the CDR cell as of now but it will be termed as a failed company and taken out of CDR after a review if it fails to comply with the CDR agreement of equity infusion by the promoters, said a senior banker at the CDR cell.
“We have asked Basix to give their plan of action. Trident has been given a one-time payment option. They are closing down the company,” the banker said, requesting anonymity. If indeed Basix is taken out of the CDR cell like Trident, the company will be forced to opt for a one-time settlement and may face the risk of closure.
Mahajan said Basix is still trying to raise equity from investors.
“We couldn’t raise equity as per the requirements of the CDR. We are still trying. Since the Andhra Pradesh crisis, we have collected Rs.300 crore from outside Andhra Pradesh,” Mahajan said.
Basix is the worst-hit among the large MFIs. The firm has about Rs.500 crore of bad loans in Andhra Pradesh and a performing loan book of about Rs.100 crore.
Prior to the crisis, Basix had a loan book of Rs.1,800 crore but mounting bad loans impacted the cash flows of the company and made its net worth negative.
In 2011, banks restructured about Rs.6,000 crore worth of loans to microlenders after the Reserve Bank of India (RBI) allowed them to do so without terming them as non-performing assets. Despite this, the financial position of these firms failed to improve. It, in fact, worsened when the moratorium given by banks to these firms as part of CDR got over.
The 2010 Andhra Pradesh law, promulgated after a few borrowers committed suicide allegedly forced by coercive recovery methods and multiple lending to the same borrower, led to a slump in loan recoveries and a halt in bank funding to the sector. In a bid to resolve the issue, RBI later issued regulations to govern microlenders but the central bank’s regulations haven’t helped Andhra Pradesh-based microlenders as the state government hasn’t relaxed its law in the state.
A proposed national Microfinance Bill, which promised a uniform national regulation for microlenders, is set to lapse for the second time because it still faces many roadblocks that Parliament may not be able to clear before its term comes to an end in a few months.
This, too, has cast shadows on the future of the microlenders in the state.
As at end-November, banks had lent Rs.18,200 crore in the form of micro credit, which includes loans to MFIs and small groups of women borrowers called self-help groups or joint liability groups.
Some microlenders that had gone through the CDR mechanism have improved their business positions, officials at these companies said. For instance, Spandana, which recast Rs.2,000 crore of loans in 2011, has received Rs.1,150 crore of additional debt from CDR lenders after the company convinced them about its improving business position.
“The performance of Spandana has been improving. We have got a priority debt of Rs.1,150 crore from the banks,” said G. Padmaja Reddy, founder and managing director of Spandana. Of the Rs.2,000 crore loan book of the company, nearly half is stuck in Andhra Pradesh in the form of bad loans.
M. Udaia Kumar, founder and managing director of Share Microfin Ltd, said both Share and Asmitha, which are related entities, improved their business positions post the Andhra Pradesh crisis. Both the companies, together, restructured about Rs.3,200 crore in 2011.
“We have disbursed about Rs. 8 crore of loans in Andhra Pradesh in the recent months on a pilot basis and the repayment rate is nearly 100%. Customers are also willing to repay the old loans if given a restructuring facility,” Kumar said.