Mumbai: Microfinance institutions (MFIs) with significant exposure to Andhra Pradesh, once their biggest market, will have their net worth eroded in the year ending March and many of them will not be able to maintain the required minimum capital adequacy ratio from the next fiscal.
Under Reserve Bank of India (RBI) norms, all MFIs under the category of non-banking financial companies (NBFCs) are required to make 100% provisions for their entire exposure to Andhra Pradesh; these loans had turned bad by November last year.
Hefty provisions, coupled with the high operational costs, are eroding the net worth of these MFIs. Under RBI norms, NBFC-MFIs are required to have a minimum net owned funds of Rs.3 crore by March 2013 and Rs.5 crore by March 2014.
MFIs will also find it difficult to maintain minimum capital adequacy, a measure of financial strength expressed as a ratio of capital to risk-weighted assets. Under RBI norms, MFIs are required to maintain 15% capital adequacy ratio.
RBI in August 2012 allowed MFIs to spread the provision requirement over five years till March 2017.
This means their capital will be eroded progressively every year unless they generate profits to plough back. “This will eventually put pressure on these firms to maintain the required minimum capital,” said Padmaja Reddy, founder and managing director of Andhra Pradesh-based Spandana Sphoorty Financial Ltd.
Spandana’s capital adequacy ratio will fall to 1% next fiscal from 21% now, Reddy said.
Spandana has a negative net worth of Rs.650 crore on its balance sheet after making about Rs.1,300 crore of provisions for its exposure in the southern state. Similarly, Trident Microfin Pvt. Ltd will have a negative net worth of Rs.57 crore in its March balance sheet after providing Rs.112 crore to cover its exposure.
Troubles started for the sector in October 2010 when a state law promulgated by the government of India’s fifth largest state upset their business model. The law followed suicides by over-extended borrowers allegedly subjected to harassment by loan recovery agents.
MFIs were barred from doing business at customers’ doorsteps, asked to collect loan instalment from borrowers monthly instead of weekly, and had to take government approval to give a second loan to the same borrower.
Since the law came into existence, the business of all micro lenders with significant business in Andhra Pradesh has deteriorated, with collection rates falling drastically and fresh lending coming to a halt.
Most leading MFIs in the state such as Trident Microfin, Share Microfin Ltd, Asmitha Microfin Ltd, Spandana and Bhartiya Samruddhi Finance Ltd had to restructure their loans while the money raised from a pubic issue just before the crisis came to the rescue of SKS Microfinance Ltd (SKS). Even SKS has written off about Rs.1,300 crore loans in the southern state. It currently has a net worth of Rs.434.68 crore.
Spandana’s loan book shrank to Rs.4,500 crore before the crisis to Rs.2,500 crore now, of which the Andhra Pradesh portfolio is Rs.1,400 crore.
Banks have subscribed to Rs.1,000 crore worth of so-called optionally convertible cumulative preference shares offered by Spandana. The MFI is in talks with lenders to convert them to convertible preference shares, which will enable it to show them as equity capital, Reddy of Spandana said.
“There is not much hope left for revival as we all will have negative net worth soon. No investor will look at such companies for fresh investments, while support from banks, too, looks unlikely,” said the head of an MFI in Andhra Pradesh. He did not want to be named as negotiations for fresh funds are still on with banks.
The only way out, according to the official, is banks converting their debt into equity. This will lift their net worth and help maintain minimum capital adequacy. These firms received temporary relief in June 2011 in the form of a corporate debt restructuring (CDR) exercise under which they received a repayment holiday and loan rates were pared. MFIs have about Rs.6,500 crore of loans stuck in Andhra Pradesh.
“It (the negative net worth) will have a multiplier effect on the existing problems of the microfinance companies as they will not be able to attract any new investor. The only alternative is to spin off the loan exposure outside Andhra Pradesh to a separate subsidiary,” said Ravikumar Dasari, manager (non-banking finance) at rating agency Care Ltd.
Investor confidence is unlikely to be restored in the absence of a favourable verdict from the Andhra Pradesh high court and delays in the passage of a national law to clear uncertainties in the sector.
On 11 February, a high court division bench dismissed petitions filed by SKS and other micro lenders against the Andhra Pradesh Microfinance Institutions (Regulation of Money Lending) Act, 2011.
Though the court asked the state to review the law in the context of the national legislation being proposed to cover the segment, the state is unlikely to make any significant changes, experts said.
The proposed national regulation for the sector is also unlikely to get passed soon as the Bill is currently with a parliamentary standing committee and is not listed for the budget session of Indian Parliament that is underway.
The Microfinance Institutions (Development and Regulation) Bill is expected to cover all MFIs, including the smaller ones. It proposes to take MFIs outside the purview of state-level legislation such as the Andhra Pradesh law. The Bill is designed to make RBI the sole regulator of MFIs.
The Andhra Pradesh state government has expressed reservations about some of the provisions in the draft Bill, which treats micro lenders as an “extended arm of banks” and proposes to allow MFIs to collect thrifts or small deposits from borrowers.
Following the crisis in the microfinance sector, a liquidity crunch has hit all classes of institutions governed by the Bill such as NBFC-MFIs as well as non-profit organizations, said Mathew Titus, executive director at Sa-Dhan, an industry lobby of micro lenders. Subsequently, it has also affected repayments to self-help groups and cooperative societies that are exempt from the law, Titus said.
“There is a public policy issue at stake and we have to evolve a framework to find a solution to the Andhra Pradesh situation,” Titus said.