Mumbai: Vijay Mahajan-promoted Bhartiya Samruddhi Finance Ltd, or Basix, and Swaws Credit Corp. India Pvt. Ltd have sought the central bank’s approval for close to 500 crore corporate debt restructuring (CDR) by banks.

Weighing options: Vijay Mahajan. Photo: Pradeep Gaur/Mint

Once a loan asset becomes substandard, banks need to set aside money for such assets and this dents their profitability.

Earlier this year, Indian banks had restructured loans around 5,000 crore given to five microfinance institutions (MFIs) after RBI allowed the banks to do so without classifying these loans as bad loans on their books.

RBI had given a window till June 2011 for banks to complete the recast for five companies. As this window is no longer available, banks are reluctant to recast more MFI loans.

Trident Microfin Pvt. Ltd, Share Microfin Ltd, Asmitha Microfin Ltd and Spandana Sphoorty Financial Ltd and Future Financial Services Ltd have recast their loan exposure to banks. Under such a loan recast, banks typically extend the repayment term, cut loan rates and offer a moratorium on repayment among other things.

Basix initially opted out of CDR, but now wants to recast loan as it could not secure sufficient funds from private investors or banks, who had committed to infuse fresh funds to the ailing firm, one of the officials cited above said. Its lenders include HDFC Bank Ltd, Corporation Bank and Axis Bank Ltd.

MFIs are in the business of giving tiny loans to poor borrowers at 24-36% and source money from banks to do business. Typically, around 60-80% of the funds of an MFI constitutes bank loans.

Indian MFIs plunged into a crisis in October 2010 when Andhra Pradesh, which accounts for one-fourth of the market, promulgated a law to rein in the operations of microlenders after a series of reported suicides because of alleged coercive recovery practices adopted by some of the microlenders.

The law banned MFIs from collecting money from borrowers weekly, doing doorstep business and made it mandatory for MFIs to secure government approval for every second loan to the same borrower. MFIs in India’s fifth largest state saw repayment from borrowers falling to less than 5%. They also stopped giving fresh loans to borrowers.

In the aftermath of the crisis, Basix had seen its loan book shrinking to around 800 crore from around 1,800 crore last year. Out of this around 400 crore is in Andhra Pradesh, which will need recast.

Mahajan declined to comment for this story saying, “nothing is finalized yet".

K. Rahul, chief financial officer of Swaws, said the company has already sought permission from RBI for CDR and is currently in discussion with a group of lenders.

“We are seeking special dispensation from RBI to enable banks to do the recast without categorizing the loans as substandard assets," Rahul said. According to him, the company will have to restructure its entire loan book of 100 crore to comply with the RBI norms.

The firms are left with few options, but to go for CDR in the face of the new RBI regulations, which has made it mandatory to attain a minimum capital adequacy ratio of 12% by March 2012 for all MFIs having a portfolio of at least 25% in Andhra Pradesh. RBI has also asked MFIs to make 100% provisioning for loans overdue for more than 180 days from 1 April.

According to MFI officials, the Andhra-based microlenders will find it extremely difficult to comply with the regulatory norms as repayment rates from borrowers is less than 5% for most of them.

Basix has a capital adequacy ratio of around 10%, while that of Swaws is around 7%.

In August, Mahajan had said the firm has received a “lifeline" from a clutch of banks and private investors who had committed around 800 crore. However, according to the official cited above, the company could not secure these funds.

“For companies like Basix, only possible options are either to go for CDR or secure equity investment. In the current environment, getting equity investment is difficult even for good companies. That leaves only the option of CDR for them," said Santosh Singh, analyst with Mumbai-based brokerage Espirito Santo Securities Ltd.