Private sector lender Yes Bank Ltd has recalled at least Rs100 crore of loans it advanced to microfinance institutions (MFIs), which have been negotiating with commercial banks for new loans as they battle a crisis of confidence. Yes Bank is the first commercial bank to seek such a loan recall.
MFIs are in the business of giving tiny loans to poor borrowers. They borrow from banks and lend the money to their target clientele at a higher rate.
On 22 December, Yes Bank wrote to a few MFIs, including Ujjivan Financial Services Pvt. Ltd and Equitas Micro Finance India Pvt. Ltd, to pay back their loans by 31 December, according to three persons familiar with the development.
One of the three persons is a microfinance industry official, another a banker and the third the head of an MFI that received the letter from Yes Bank. All three of them declined to be named because of the sensitive nature of the issue.
“The bank has sent letters to a few MFIs, including us, asking to repay the loans by 31 December, either in part or full,” said the MFI head. “This would be extremely difficult...given the fact that the (loan) collections have fallen and operations have come to a halt.”
The amount recalled by Yes Bank amounts to almost one-fourth of the lender’s total exposure to MFIs, which ran into trouble after the Andhra Pradesh government in mid-October tightened regulations governing them.
“Yes bank is obtaining the scheduled payments from the Andhra Pradesh MFI clients,” a spokesperson for the bank said in an email response to queries from Mint. “None of the clients has defaulted or sought restructuring of loans. All scheduled payments have been met by all our five AP (Andhra Pradesh) clients.”
The bank did not respond to a specific question on loans being recalled.
Most of the MFIs Mint spoke to, except one, declined to comment for this story for fear of spoiling their relationship with commercial banks.
The Rs20,000 crore microfinance industry plunged into crisis after the Andhra Pradesh government promulgated an ordinance to control alleged coercive practices adopted by some of the lenders to recover loans. The controversial ordinance, which has now become law, restricts microfinance activities in the southern state.
The law prohibits microlenders from seeking weekly repayments and demands a no-objection certificate from local authorities to extend a second loan to a borrower.
The law also bars the lenders from doing business at borrowers’ doorstep where they collect loan repayments.
Repayment from small borrowers to MFIs in the state fell to as low as 5-10% in November following the move. Senior bank officials said some of the MFIs may start defaulting on bank loans beginning as early as January if the situation does not improve.
According to a Morgan Stanley report on bank exposure to MFIs, released in November, Yes Bank has lent around Rs450 crore to MFIs that constitute 1.5% of its total loan book. As a percentage of total loans, Yes Bank’s exposure to the sector is the highest, along with that of IndusInd Bank Ltd.
Among other banks, Axis Bank Ltd and ICICI Bank Ltd have at least 1% or more exposure to the sector.
MFIs, at the intervention of the Reserve Bank of India (RBI), have been in talks with commercial banks to secure new loans to keep their business going.
Analysts said Yes Bank’s move is aimed at reducing its exposure to MFIs and protect its loan quality.
“For the bank, it’s a good move. The MFIs, however, will not be able to repay these loans in such a short time. If other banks follow this route, it will be a contra-move as RBI has asked banks to resume lending to the sector,” said Abhishek Kothari, a research analyst at Mumbai-based Way2Wealth Brokers Pvt. Ltd.
Indian banks had total loans outstanding of around Rs14,000 crore to MFIs as of 31 March.
RBI met leading bankers in Mumbai last week to discuss the issues faced by the microfinance industry and also directed the Indian Banks’ Association, a bank lobby, to devise a plan to support the sector.
The banking regulator has also appointed a committee headed by one of its board members, Y.H. Malegam, to review regulations governing the sector. The panel is expected to submit its recommendations by mid-January.
A statement by the central bank said it has “sensitized the banks to the need to maintain funding lines to MFIs on merits to prevent contagion”.
According to senior industry officials, the loan recall may push microfinanciers into deeper trouble at a time when they are reeling from a steep drop in their debt collection rates in Andhra Pradesh, where some political parties have waged a campaign prompting borrowers not to repay their dues.
Vijay Mahajan, president of the industry association Microfinance Institutions Network, said such actions by banks in the current scenario will be counterproductive.
“This is the time when MFIs are looking for support from banking sector. If any bank is contemplating such an action, it will be counterproductive and it is not in the right spirit,” Mahajan said.
He, however, said the association would not comment on bank-specific matters.