Mumbai/Hyderabad: A debt swap proposed by the Andhra Pradesh government to help borrowers in the state switch from high-cost microfinance loans to low-cost bank loans is likely to be met with a tepid response from bankers, who fear that such an arrangement could hurt asset quality because microlenders follow a different business model and take no collateral.
The state government has reached out to banks through the state-level bankers’ committee (SLBC), a banking forum.
The swap involves banks taking over the loans given by microfinance institutions (MFIs) to self-help groups and individuals.
MFIs lend money to low-income borrowers at 24% to 36% while banks lend at 9% to 12%.
The MFI industry in Andhra Pradesh has been facing a crisis in the aftermath of a state government ordinance that tightened regulation of microlenders.
A senior state government official said bankers are yet to respond to the proposal.
“SLBC has constituted a core committee to discuss and come out with a report on the feasibility of the debt swap. There is no progress as of now. We are expecting SLBC to submit its report to us sometime next week,” said Reddy Subrahmanyam, principal secretary of the panchayat raj and rural development ministry.
There were few takers for the debt swap when senior bankers met in Mumbai last week to consider the proposal.
The meeting was attended by leading bankers—including State Bank of India chairman O.P. Bhatt, ICICI Bank Ltd managing director and chief executive officer Chanda Kochhar, and Punjab National Bank Ltd chairman K.R. Kamath, among others, according to a senior banking industry official who was part of the meeting.
“They (state government) had proposed that banks can take over those loans. Banks are not ready for that because the quality of assets may not be good. Also, MFIs are operating on an entirely different model, which is difficult for banks to follow,” the banker said on condition of anonymity.
This is not the first time banks have shown reluctance to such a debt swap proposal. In 2004, the first United Progressive Alliance government had tried to implement a similar scheme, asking banks to take over the advances of money lenders. There were not too many takers as banks were doubtful about the quality of such debt.
Indian banks, including Small Industries Development Bank of India (Sidbi), had outstanding loans of around Rs14,000 crore to MFIs at the end of March, according to the National Bank for Agriculture and Rural Development.
R. Ramachandran, chairman and managing director of Andhra Bank, which is the convener of SLBC in Andhra Pradesh, said in a lenders’ meeting on Friday, organized by Sidbi, that bankers could not take a decision on debt swaps at the SLBC level.
“Neither Andhra Bank nor SLBC had ever said they will go in for debt swapping. The issue is a policy issue that needs to be decided by the sectoral regulator. Banks cannot take a decision on the issue of debt swapping at the SLBC level,” Ramachandran said.
A senior official of Manglore-based Corporation Bank also said banks are not in favour of the proposal. “Banks do not have the infrastructure to take over MFI advances. They (MFIs) operate in interior regions and have daily or weekly collections. Also, the portfolio may not suit banks’ lending policies and due diligence processes,” the official said.
Besides these factors, a good chunk of MFIs’ lending is for non-productive purposes, which makes a debt swap difficult for banks, the official, who also declined to be named, added.
Senior MFI officials said this move, if it happens, could lead to the closure of many MFIs and affect the credit culture of borrowers.
“What infrastructure do banks have to disburse loans to this class of customers and collect money from them, and understand their needs? This is not a viable proposal. If the debt swap happens, MFIs will have to close down their business and the poor will have to go back to moneylenders. The credit culture of poor borrowers will also suffer,” said Chandra Shekhar Ghosh, chairman and managing director of Bandhan Financial Services Ltd, a microlender.