Microfinance firms’ loan recast hits a roadblock

Microfinance firms’ loan recast hits a roadblock

Mumbai: Kishore Kumar Puli has to put his personal wealth at stake if he is to convince bankers to restructure the growing debts of Trident Microfin Pvt. Ltd, a Hyderabad-based microlender he has promoted.

Trident is one among five microfinance institutions (MFIs) in Andhra Pradesh in talks with lenders for a corporate debt restructuring (CDR) exercise, a lifeline for companies with cash flow problems. A CDR package is an agreement between the bank and the borrower firm under which the bank extends the term of repayment and decreases the interest rate burden to facilitate repayment.

The bank consortium working on the CDR package for Puli’s firm insists on personal guarantees equal to the 126 crore loan that is sought to be recast.

Puli has a personal net worth of around 4.5 crore, including the value of his shareholding in the company.

“For me, it is impossible to give guarantees of that big an amount as my whole net worth will not cover even a fraction of that," said Puli, who also heads the Andhra Pradesh chapter of Microfinance Institutions Network, an industry body.

Microlenders in Andhra Pradesh have seen repayment rates drop to 10-15% of their book, following a state law restricting their operations. MFIs raise money from banks and give tiny loans to the poor.

Besides Trident, Share Microfin Ltd, Asmitha Microfin Ltd, Spandana Sphoorty Financial Ltd and Future Financial Services Ltd are also trying to restructure their debt.

M. Udaia Kumar, managing director of Share Microfin, said the company has opted to restructure its debt. He said his firm would have to negotiate with lenders on the issue of a personal guarantee from him.

Emails, phone calls and text messages sent to Spandana and Asmitha remained unanswered. Future Financial could not be reached.

Senior executives in microfinance firms said the proposed CDR exercise in the 22,000 crore sector may not take off if banks continue to insist on a complete guarantee from promoters; MFI promoters are hesitant to provide this. Banks are asking for personal guarantees even though current Reserve Bank of India (RBI) norms prohibit them from doing so if an external situation leads to the difficulty, the executives claimed.

“The banks can recover only to the extent to the assets of the promoter. The entity that takes the personal guarantee must do the required due diligence of the guarantor’s net worth. If the promoters give a wrong declaration in the course of due diligence, then they can be taken to court," Bomi Daruwala, partner at legal firm Vaish Associates Advocates, said.

The total exposure of Indian banks, including the Small Industries Development Bank of India, to the microlending industry was about 14,000 crore on 31 March 2010. Out of this, the amount to be restructured under the CDR route is estimated to be above 3,000 crore. Banks have to complete the modalities of the CDR process by 6 June.

If they go ahead with the debt-restructuring exercise, banks will give a moratorium of one-two years to the companies, besides extending the maturity of the loans to 7-10 years. The interest rate will also be reduced to 10-12% from 12.5-13%.

Banks have been not too keen to restructure the loans of MFIs due to continuing uncertainty in the Indian microfinance sector even after RBI allowed them in January to restructure the loans without classifying them as non-performing assets (NPAs). Once a loan is classified as NPA, banks have to set aside money to provide for it.

Not a single restructuring exercise has been completed, said executives in microfinance firms.

Most banks are also yet to start fresh lending to MFIs and are instead trying to cut down their existing exposure.

“Banks are not really keen to do the restructuring as their confidence in the sector has gone down significantly, especially in Andhra Pradesh. None of them wants to add to their NPAs," said a senior banker on condition of anonymity.

According to Puli, even though MFIs are ready to pledge shares to service the debt under the CDR package, banks are insisting on personal guarantees apart from pledged shares and other collateral.

A senior State Bank of India official confirmed that the bank consortium has sought promoter guarantees, but said it is not a “must". “We have sought personal guarantees from MFIs given the situation in the state. This will give banks the comfort to go ahead with loan restructuring," the official, who is directly involved in the process, said.

Mathew Titus, executive director of industry association Sa-dhan, said the slow progress of the debt restructuring process could worsen the situation in the microlending sector.

“We are losing precious time and the longer it takes to restructure the debt, greater will be the damage in the sector. Banks need to be innovative to fund the sector and need to assess the quality of business," he said.