Mumbai: Five leading Indian microfinance institutions (MFIs), struggling because of a fund squeeze that has gripped the industry, have been accorded a substantial measure of relief by banks approving the restructuring of around Rs 5,000 crore of debt.
Trident Microfin Pvt. Ltd, Share Microfin Ltd, Asmitha Microfin Ltd and Spandana Sphoorty Financial Ltd have had their corporate debt restructuring (CDR) plans approved. That of Future Financial Services Ltd, another microlender based in Andhra Pradesh, had been cleared earlier.
The Andhra Pradesh government last year tightened rules for microlenders, citing coercive repayment methods and multiple lending to the same borrower. That led to a slump in loan recoveries and a halt in bank funding to the Rs 22,500 crore industry, of which Andhra Pradesh accounts for about one-fourth. The state is also home to the largest and only listed Indian MFI, SKS Microfinance Ltd.
MFIs lend small amounts to low-income borrowers at a maximum 24% after borrowing from banks at 10-12%. They lend at a higher rate citing operational costs.
CDR is an agreement between a group of banks and a borrower under which the lenders generally extend the repayment term and offer a moratorium.
The recast of about Rs 2,000 crore of loans will help Spandana Sphoorty restore “business back to the normal cycle”, said Padmaja Reddy, managing director.
The CDR package stipulates a one-year moratorium on repayments and seven years to repay loans for the five MFIs.
The banks also plan to convert a part of the debt into convertible preferential shares. These will be turned into equity if any of the five MFIs default. MFIs are still negotiating with banks over converting a portion of the debt directly into equity.
Banks will also have two-three nominees on the boards of the microlenders and a larger say in the appointment of chief financial officers and other key officials. This will allow them to ensure that further slippages do not take place.
“There will be close monitoring of the cash flow of these firms to avoid any further issues,” said a senior official of a large state-run bank involved in the CDR process.
According to senior MFI executives, banks taking operational control is a positive step and will bring in better discipline.
“The loan recast is a much-welcomed move as it is important for the industry to return to normalcy,” said Mathew Titus, executive director of microfinance industry association, Sa-Dhan.
The CDR programme got stuck in April, when banks insisted on personal guarantees from MFI promoters equivalent to the loan amount to be restructured. A personal guarantee is an assurance that makes the promoter personally liable for debt obligations in case of a loan default.
The banks had to relax their stance owing to the reluctance of promoters to provide personal guarantees and instead asked MFI promoters to pledge 100% of their holding to banks.
According to industry officials, out of the five MFIs that have had their CDR plans approved, the promoters of only one—Future Financial Services—agreed to provide personal guarantees.
During the CDR meeting, MFIs also asked banks to provide fresh funding of at least Rs 200 crore to the microlenders immediately, but they were turned down.
“The debt recast will help improve sentiment in the microfinance industry and assist both banks and MFIs to gain normalcy back in their business cycle,” said Alok Prasad, chief executive officer of Microfinance Institutions Network.
Indian banks, which have lent a total of around Rs 14,000 crore to MFIs, saw the risk of exposure rise in the wake of the Andhra Pradesh crackdown in October.
Microlenders saw repayments of loan instalments fall to 10-15%. Banks stopped fresh funding to MFIs, and microlenders, in turn, stopped new loans.
Banks agreed to the CDR plan after the Reserve Bank of India allowed this to go ahead without the loans being classified as non-performing assets, or bad loans. Typically, when banks restructure loans, they need to make provisions for this and taking a hit on the balance sheet.
The refusal of fresh funding is likely to keep MFIs under pressure.
“Despite the debt recast facility, it will take at least two years for our business to get back to normal,” Padmaja of Spandana said.
Banks resuming fresh lending to microlenders will be critical for the industry to regain momentum.
“When banks take control over the management of MFIs, that will bring in a confidence among banks and the industry. However, as far as the funding is concerned, the scenario is still difficult as banks are not willing to go for fresh funding. At present, all microlenders are focusing on consolidating their business,” said Ravikumar Dasari, manager (non-bank finance company ratings) at CARE Ltd.