Mumbai: The industry lobby group of India’s microlenders has sought the permission of the Reserve Bank of India (RBI) for a second round of loan restructuring for five troubled microfinance companies, Bhartiya Samruddhi Finance Ltd or Basix, Spandana Sphoorty Financial Ltd, Trident Microfin Pvt. Ltd, Share Microfin Ltd and Asmitha Microfin Ltd.

The Microfinance Institutions Network, or MFIN, wants the recast to happen under RBI’s so-called corporate debt restructuring (CDR) facility, without its loans being classified as bad.

The lobby group’s plea comes after banks refused to restructure the loans without RBI relaxing rules that require banks to significantly increase the money they set aside for loans that are restructured twice. Under current norms, banks need to set aside 15% of the loan amount as provision while restructuring a loan for the second time, treating it as a bad loan. For other loans, the provisioning is 0.4%.

CDR is a facility under which banks may extend the repayment period, cut interest rates, provide a repayment holiday (or moratorium), convert part of a loan into equity, even write down the loan amount.

The five microfinance companies were the worst hit by a law promulgated by Andhra Pradesh in October 2010 that made it difficult for them to issue new loans, and even more difficult to collect old ones.

In 2011, banks restructured about 6,000 crore worth of loans to microlenders after RBI allowed them to do so without terming them non-performing assets (NPAs) or bad loans. Microfinance companies typically loan small sums to low-income borrowers and source money mainly from banks to do business.

These microfinance companies have now been forced to seek another round of loan restructuring because of their continued inability to recover money from borrowers in Andhra Pradesh.

They had agreed to do so in their original restructuring deal.

The moratorium extended by bankers to these firms ended earlier this year and a few of the companies said they would not be able to service their loans from this quarter. Optional convertible bonds subscribed by the banks have also come up for redemption.

The microfinance companies have also been hit by high provisioning requirements; they are required to make a 100% provision on loans that are overdue more than 180 days, even though this was relaxed for companies based in Andhra Pradesh.

That hasn’t helped because the credit culture in the neighbouring states have turned bad, said the head of one microfinance company.

“Borrowers have stopped repaying loans even in the neighbouring districts of Andhra Pradesh, in states like Maharashtra, Karnataka and Orissa. Basix has about 165 crore loans overdue more than 180 days, for which we had to make full provisioning," said Vijay Mahajan, chairman of the Basix group.

Basix has 500 crore of bad loans in Andhra Pradesh and a performing loan book of 89 crore. Prior to the crisis, the company had a loan book of 1,800 crore. The firm, which went for a first loan recast of 650 crore in June 2012, couldn’t meet a 30 June deadline to raise equity because investors are not willing to invest in the firm, which has failed to recover loans.

The Andhra Pradesh government came with a law to regulate microlenders, citing coercive recovery methods and multiple lending to the same borrower. The regulations led to a slump in loan recoveries and a halt in bank funding to the sector. The state is also home to India’s largest microlender, SKS Microfinance Ltd.

In a bid to resolve the issue, RBI later issued regulations to govern microlenders. The Union government is currently in the process of framing nationwide laws for the sector.

In a letter to RBI, MFIN said that if the loans aren’t restructured, the microfinance companies could default in the near future. Mint has reviewed a copy of the letter.

That apart, MFIN has also sought exemption for microfinance companies on promoters’ contribution of 15%, which is mandatory under current norms; and the recognition of microfinance portfolios in areas contiguous to Andhra Pradesh, such as Orissa and Karnataka as a larger Andhra Pradesh-related portfolio.

The microlenders “need more time to revive their business as recovery is yet to happen in Andhra Pradesh. The success of the restructuring is now critically dependent on whether they are able to get more time, given the fact that the Andhra Pradesh impasse remain," said Alok Prasad, chief executive of MFIN.

Banks, though, are sceptical about another round of restructuring and said it depends on their conviction about the ability of the microfinance companies to improve their situation. “We cannot take a decision on our own (without consulting other banks). If these companies are in a position to recover dues from the ground, we will definitely give them assistance," said N.K. Maini, deputy managing director at Sidbi.

Sidbi is one of the major lenders to microfinance companies. As on 31 May, banks have a loan outstanding of 17,900 crore to microcredit, which include loans to self-help groups.

Two years after the crisis, none of the Andhra Pradesh based microfinance companies have been able to recover any significant amount in the southern state, where about 6,000 crore of their loans are stuck.

Like Basix, Spandana, too, is struggling to revive its business. The company has total repayments of 1,850 crore to banks; of this, 850 crore is term-loans and the remaining, the repurchase of optionally convertible cumulative preference shares (OCCPS), which were subscribed by bankers as part of the CDR. The firm hasn’t been able to meet a 30 June deadline to meet the redemption of convertible bonds.

“We have 1,200 crore loan yet to be recovered from Andhra Pradesh and a performing loan book of 1,000 crore outside the state, where the loan recovery rate is still 99%. If we need to continue making payments, we will have to run down our performing portfolio," said G. Padmaja Reddy, founder and managing director, Spandana.

Experts said that even if RBI agrees to MFIN’s request, microlenders would continue to bleed. “Chances of recovery from Andhra Pradesh is less unless the ground level operational environment changes in the state," said Ravikumar Dasari, senior manager, corporate ratings at Care. “Even if RBI extends assistance, that is unlikely to help," Dasari said.

Trident, the smallest of the five microfinance companies, said it, too, would not be able to continue repayments after September.

Out of its 130 crore loan book, 118 crore is in Andhra Pradesh. “We won’t be able to repay from the September quarter because our cash flows are squeezed," said Kishore Kumar Puli, managing director and chief executive officer of Trident Microfin.

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