Mumbai: Microfinance institutions (MFIs) in Andhra Pradesh, hit by a slump in loan repayments since October last year that has led to a sharp deterioration in asset quality, may get a break, with the state government planning to ask commercial banks to assist microlenders in restructuring loans given to distressed debtors.
The move would be the first time the state government has sought to alleviate the distress of MFIs, after its tightening of the rules led to their current straits. Andhra Pradesh is critical to microlending because the state’s borrowers account for about a quarter of the Rs 20,000 crore business and most of the MFIs are based there.
“Bankers are primarily affected by this (defaults in the microlending industry). So the state-level banking committee (SLBC) can recommend banks to hold dialogue with MFIs. We are certainly going to write to SLBC on this,” said Reddy Subramaniam, principal secretary (rural development), Andhra Pradesh.
MFIs are in the business of giving small loans to low-income borrowers at 24% and mainly source funds from banks. The state had tightened the rules owing to accusations of coercive collection methods and alleged suicides by borrowers who couldn’t make repayments. Most borrowers stopped repaying loans, following a state-wide campaign by various political outfits once the new rules were put in place.
The Microfinance Institutions Network (Mfin), an association of Indian microlenders, approached the state government last week with a proposal to offer relief to borrowers and normalize the microlending business. MFIs also agreed to recast loans if given necessary support. They also sought the state’s support to improve recovery from millions of defaulters and facilitate fresh loan disbursals by simplifying procedures.
Subramaniam, however, ruled out any possibility of relaxing the state law.
“They (MFIs) want the government to help in the recovery,” he said. “We cannot be a recovery agent. We can only ensure there is a level playing field.”
According to him, if the restructuring proposal takes shape, MFIs will reduce interest rates on loans given to distressed borrowers to 15%. Also, the repayment period for such loans will be extended to four-five years from around one year now.
The Reserve Bank of India (RBI) has allowed banks to recast loans worth about Rs 5,000 crore made to five microlenders through a corporate debt restructuring (CDR) programme.
Under CDR, banks extend the repayment period or reduce interest rates for distressed borrowers. MFIs admitted to the CDR process in Andhra Pradesh include Trident Microfin, Share Microfin, Asmitha Microfin, Spandana Sphoorty and Future Financial Services.
Banks are currently in the process of implementing a loan recast for MFIs, which, industry officials say, will give them more control over their operations, such as appointment of key executives and monitoring daily cash flows. Traditionally, commercial banks contribute as much as 80% of the funds of an MFI.
A group of banks, led by Indian Overseas Bank, has agreed to acquire a 72% stake in Trident by converting debt into equity. Trident has a loan book of Rs 136 crore and 200,000 customers.
Indian banks have lent Rs 24,178 crore to small borrowers directly and indirectly through MFIs as well as self-help groups as of 29 July, with the Small Industries Development Bank of India, State Bank of India and ICICI Bank Ltd having the major exposure to the sector.
“Today no fresh lending and no repayment is happening. The question is how to break this impasse,” said Alok Prasad, chief executive officer of Mfin. “Restructuring will allow borrowers to get relief on their repayment burden. Also, this will help to restore their credit record.”
The state law prohibits MFIs from collecting loan instalments and doing doorstep business, and makes it mandatory for MFIs to secure government approval for a second loan to a borrower.
Following this, debt collection rates of MFIs fell to 5-10% in Andhra Pradesh and fresh lending came to a grinding halt. Commercial banks, too, stopped lending to MFIs.
Prasad said the state government should aim to create a conducive atmosphere for microlenders to operate.
“If MFIs are giving a generous package to borrowers, then there is an expectation that the state government also respond positively,” he said. “The issue is: can banks normalize conditions on the ground? They can’t. Only the state government can normalize conditions on the ground.”
Senior MFI industry officials, however, are not too optimistic about a revival led by the restructuring of loans. Fresh loan availability from commercial banks and easy loan approval process are critical, they said.
“Restructuring can help, but is not a solution. Borrowers are not repaying thinking that this company is not going to give fresh loans. Also, it still takes a long time to get a no-objection certificate from the government while issuing a fresh loan,” said the head of a Hyderabad-based MFI. He did not want to be named.
Analysts, too, said any restructuring is unlikely to work unless banks give fresh money to MFIs to resume disbursals.
“The real problem is with borrowers, who are not repaying. The critical question is whether banks will lend to MFIs to disburse new loans. Only then (will) any restructuring process,” said Ravikumar Dasari, manager (non-banking finance company and microfinance division) at rating agency Credit Analysis and Research Ltd.
According to a senior banker, while restructuring could help improve the scenario, banks are still not forthcoming to take fresh exposure MFIs in the state due to the current situation. None of the bankers Mint spoke to wanted to be identified.