Mumbai: Banks are set to play a bigger role in the oversight of microfinance institutions, or MFIs, especially those operating in Andhra Pradesh, and will even monitor their daily cash flow management because of the high risk they face in lending to microlenders.
Senior executives of almost all large banks met in Mumbai on Monday to finalize the modalities of their involvement with the Rs20,000 crore microlending industry before they resume lending to MFIs, and devise a restructuring package for the troubled industry.
The banks decided to form so-called lenders’ groups to continue assistance to MFIs and to take a closer look at the operations of large microlenders.
These groups of eight to 10 banks each will monitor operations and cash flows of MFIs, including salaries paid to their top executives, in an attempt to constantly assess their business position and ensure their ability to repay loans, said two people familiar with the development, a senior banker who attended the meeting and the head of a Hyderabad-based MFI. Both asked not to be identified, citing the sensitivity of the matter.
“Banks will monitor cash flows (of MFIs) and will look into all sorts of expenses that can be controlled, including the salaries of top executives and (will also look into) governance aspects,” the banker said.
Banks are also likely to insist on representation on the board ahead of lending significant amounts to MFIs so as to keep a close tab on their operations, the banker said.
Even now, some MFIs, including Bandhan Financial Services Pvt. Ltd, have bank representatives on their boards.
Bandhan is the fourth largest MFI by assets with Rs2,339 crore loan outstandings in December.
SKS Microfinance Ltd is the largest and the only listed MFI in India. Spandana Sphoorty Financial Ltd and Share Microfin Ltd are the other leading microlenders that have operations in Andhra Pradesh, which accounts for more than a quarter of the Rs20,000 crore microlending industry in the country and has 9.7 million microfinance borrowers.
In recent months, MFIs have faced criticism from various quarters, including nobel laureate Muhammad Yunus and former Reserve Bank of India governor Y.V. Reddy for turning profit-hungry and deviating from their original mandate of lending to the rural poor through self-help or joint liability group models at reasonable rates.
Last week, a Reserve Bank of India-appointed panel suggested a 24% lending rate cap for MFIs and recommended that their borrowers belong to households where incomes do not exceed Rs50,000. It has also asked for capping an MFI’s exposure to an individual at Rs25,000.
Microlenders are against these recommendations because most of their borrowers earn more and they will likely lose business if these recommendations are accepted by the regulator.
Microlenders are in the business of giving tiny loans to poor people. Typically, they charge 24-36% from borrowers compared with banks, which lend at 9-12% to microfinanciers. The wide differential is on account of operating costs and higher risks.
An executive at a microfinance company said the move by the banks to get involved in operations of MFIs could amount to “micromanagement”.
“Overall, our business runs on trust. If the banks wish to do so (micromanage), we will have to accept it,” said the head of the MFI, who spoke on condition of anonymity as he did not want to spoil his relationships with his banks.
Another official supported the move.
“There is no problem with this. Already some banks have members on boards of MFIs. That is helpful to the organization as it helps to reduce multiple lending and regain the trust of customers,” said Chandra Shekhar Ghosh, chairman and managing director of Bandhan Financial Services.
The sector plunged into a crisis in mid-October when a controversial state law in Andhra Pradesh imposed heavy restrictions on the operations of MFIs, prohibiting weekly collections and making government approval mandatory for a second loan to a customer.
Collection rates slumped to 10-15% and MFIs almost stopped issuing new loans. Banks, too, stopped fresh lending to MFIs.
On 19 January, RBI announced several measures, including allowing banks to restructure loans given to MFIs without classifying them as non-performing assets, even if they are not fully backed by collateral.
Banks could do this till 31 March, the banking regulator said.
Indian banks had a combined exposure of around Rs14,000 crore to MFIs as on 31 March, according to the National Bank for Agriculture and Rural Development.
Meanwhile, the banks have started the restructuring process for large MFIs in Andhra Pradesh.
According to the restructuring plan, the lenders’ groups will work out the restructuring package for MFIs after assessing their business position and will decide the extent of restructuring they need.
The restructuring will be done either through extension of the repayment period of loans given to MFIs from six months to one year or even beyond, or by way of a complete moratorium.
Each consortium of eight to 10 banks will depute a smaller group of three banks to work with the MFI involved on the restructuring package, the banker said.
“This way, you can assess the business conditions of individual banks and the kind of assistance they will need from the lenders,” this person added.
While announcing its liquidity support measures, RBI had also asked banks to recycle loans to the sector. This means banks will continue lending to MFIs to the extent of repayments from MFIs.