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Business News/ Home-page / Sidbi gives 100 crore loan to SKS
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Sidbi gives ₹100 crore loan to SKS

Sidbi gives ₹100 crore loan to SKS

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Bloomberg

Mumbai: Small Industries Development Bank of India (Sidbi), the apex lender to small firms, has issued a 100 crore term loan to the country’s lone listed microlender, SKS Microfinance Ltd.

This is the first major bank loan given to any microlender based in Andhra Pradesh since banks stopped lending to microfinance institutions (MFIs) after a state law triggered a crisis in the sector in October 2010. MFIs give small loans to poor borrowers at interest rates between 24% and 36%.

Sidbi has given the three-year loan at 13.5% to the cash-strapped MFI, which had posted a 428 crore loss in the third quarter, largely because of huge loan write-offs in the southern state. The rate is 100-150 basis points higher than the interest rate at which banks typically lend to MFIs. One basis point is one-hundredth of a percentage point.

SKS is one of the many MFIs severely hit by the crisis. Its loan book declined to 1,810 crore at the end of December 2011 from 5,000 crore in September 2010, and banks’ exposure to SKS fell to 1,250 crore in December 2011 from 3,200 crore in 2010.

Bloomberg

Sushil Muhnot, Sidbi’s chairman and managing director, confirmed the transaction.

Dilli Raj, chief financial officer of SKS, declined comment.

The Andhra Pradesh law prohibited MFIs from collecting loan instalments weekly from borrowers and made it mandatory for them to secure government approval before issuing a second loan to borrowers. The regulations affected the operations of MFIs in the southern state, pushing their collection rates to 5-10%.

Commercial banks, too, stopped loaning money to MFIs.

The Indian microlending sector has been reeling under a severe fund squeeze in the last one year, even forcing many of the smaller MFIs to shut shop. The Reserve Bank of India (RBI) has capped the interest rate MFIs can charge at 26%, the processing charge at 1% and margins at 12% as preconditions to qualify for loans from banks. Typically, bank funds make up 80-90% of the resources of MFIs.

WATCH VIDEO

Small Industries Development Bank of India has loaned struggling firm SKS Microfinance Rs100 crore. Mint’s Dinesh Unnikrishnan lays out the implications for India’s embattled micro lending sector

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Ujjivan raises 128 cr

Subsequently, some private investors have started returning to the market. For instance, Bangalore-based Ujjivan Financial Services on Wednesday said it has raised 127.9 crore from private institutional investors, including the Netherlands’ Financierings-Maatschappij voor Ontwikkelingslanden NV and WCP Mauritius Holdings III (Wolfensohn Capital Partners).

In September, Kolkata-based Bandhan Financial Services, too, had raised private equity funding of 135 crore from International Finance Corporation.

Earlier, in June, Janalakshmi Financial Services raised Rs65 crore.

Senior industry officials said Sidbi’s loan to SKS is a positive signal and could encourage other lenders to start lending money to MFIs. “Sidbi has taken the lead. Though other banks have begun lending to the sector, those have been mostly outside. This is clearly a positive sign," said Samit Ghosh, managing director of Ujjivan.

Some industry officials continue to be apprehensive about the availability of bank loans to the sector and say that unless other banks also open up funding channels to microlenders, the survival of MFIs in Andhra Pradesh is suspect.

“Most of the large players in the sector have recast their loans. This is (like) supporting life with the aid of machines on a temporary basis. Unless you give oxygen to the patient, he will die eventually. This oxygen is fresh loans to MFIs," the head of one of the leading microlending firms in Andhra Pradesh said, asking not to be identified.

In the aftermath of the crisis, which brought down the size of the Indian microlending business from around 30,000 crore two years back to around 15,000 now, commercial banks admitted five leading MFIs with operations in Andhra Pradesh in the corporate debt restructuring (CDR) programme in April. The firms are Trident Microfin Pvt. Ltd, Share Microfin Ltd, Asmitha Microfin Ltd, Spandana Sphoorty Financial Ltd and Future Financial Services Ltd.

Banks conducted the 5,000 crore recast after RBI allowed them to do so without classifying the loans as non-performing assets (NPAs) on their books. Under CDR, banks typically extend the repayment term, cut loan rates and offer a moratorium on repayment, among other things.

Two other leading MFIs— Bhartiya Samruddhi Finance Ltd (known as Basix) and SKS —had opted out of the CDR plan. Basix was banking on private investors to tide over the fund crunch, while SKS had funds raised from the market through its initial public offering in July 2010.

Basix, along with other few small MFIs, has now approached banks for a loan recast as it could not secure funds from private investors who had earlier committed to infuse funds. Banks are reluctant to carry out the second round of CDR without getting a special dispensation from RBI that allows them to treat such assets as standard assets, not requiring them to set aside money.

Shares of SKS on Wednesday rose 0.73% to close at 89.50 on BSE even as the bourse’s benchmark equity index, the Sensex, gained 0.62%. SKS’ stock is 94% off its peak.

Meanwhile, SKS on Wednesday appointed Verghese Jacob as an ombudsman to redress grievances of borrowers and customers.

Analysts said banks are expected to give more loans to large MFIs as they have to meet the so-called priority sector lending (PSL) target. Under these norms, banks lend 40% of their loans to agriculture, exports and other weaker sections. Loans to MFIs are included in PSL.

“Banks have to push funds to the existing MFIs to get the PSL benefit. Only a few players are left in the sector as most of the larger companies are admitted to CDR. Banks are left with few options," said D. Ravikumar, manager (NBFC division) at rater CARE Ltd.

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Published: 02 Feb 2012, 12:24 AM IST
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