BackBanks convert `500 crore of Basix’s debt into equity
Move is expected to help the Hyderabad-based microlender stay afloat, streamline its business
Premium(Mint)
Mumbai: Vijay Mahajan-promoted Bhartiya Samruddhi Finance Ltd (Basix), India’s oldest microlender, on Wednesday received a lifeline from its lenders, which agreed to restructure debt worth 677 crore and convert a significant chunk into equity.
This will help the Hyderabad-based microlender to stay afloat and streamline its business.
Battered by a crisis in the wake of stricter rules imposed in October 2010 by the Andhra Pradesh government, the loan book of Basix has shrunk to 124 crore from about 1,808 crore in September 2010. The firm has also slashed its staff strength.
According to Mahajan, a group of 19 lenders led by the Small Industries Development Bank of India (Sidbi) signed the corporate debt restructuring (CDR) agreement on Wednesday night.
CDR typically involves a group of banks and a borrower under which lenders extend the period of repayment by offering a moratorium. This may also involve converting part of the debt into equity and replacing rupee debt by relatively lower-cost foreign currency debt. The promoter of the company involved is often asked to bring in fresh equity.
According to the Basix CDR deal, banks will convert 500 crore or more than 75% of loans to equity, Basix will bring in 25 crore equity, and the remaining 152 crore loan will have to be repaid in seven years, Mahajan said.
“The CDR requires us to make operating profits from FY2012-13 and the only way to do this is to recover at least 100 crore of overdue loans and increase income from insurance and CSC (common service centres) services," Mahajan said. CSC refers to IT kiosks that offer services such as distribution of birth certificates on commission.
Basix is one of the two leading micro finance institutions (MFIs) that didn’t opt for CDR when banks restructured loans of five leading MFIs in Andhra Pradesh in June 2011 in the aftermath of the crisis.
The other MFI that didn’t do so is India’s lone listed microlender, SKS Microfinance Ltd.
Trident Microfin Pvt. Ltd, Share Microfin Ltd, Asmitha Microfin Ltd, Spandana Sphoorty Financial Ltd and Future Financial Services Ltd have had their loans recast as part of the CDR process mentioned above. The sector plunged into a crisis when Andhra Pardesh, the fifth largest state in India in terms of population, introduced an ordinance and later a law to control the operations of MFIs, which lend small loans to low-income borrowers at 24-36%. The law tightened rules for microlenders, citing coercive repayment methods and multiple lending to the same borrower. It prohibited MFIs from doing doorstep business and collecting loan instalments weekly. They also had to seek government approval for any second loan given to borrowers.
That led to a slump in loan recoveries to below 5% from 96-99% in Andhra Pradesh and banks stopped funding the sector. As a result, MFI assets have shrunk to around 15,000 crore from a peak of 33,000 crore.
Microlenders had succeeded to a large extent in offering loans to poor borrowers who otherwise wouldn’t get money from a bank. The new rules dealt a blow to the industry.
A state-wide campaign by the opposition Telugu Desam Party goading borrowers not to repay loans led to large scale defaults and a sharp deterioration in the credit culture in Andhra Pradesh.
The industry estimates that loans worth about 6,5,00 crore in Andhra Pradesh have turned bad.
“It makes sense for Basix to take the CDR route as banks have converted a large part of debt into equity. If CDR didn’t happen, Basix would not have survived," said Santosh Singh, analyst at Espirito Santo Securities Ltd. “However, the fact remains that CDR is only a temporary relief and they will have to recover money from the ground."
Late last year, the Reserve Bank of India (RBI) had framed regulations to govern the sector. According to RBI norms, MFIs with more than 100 crore of loans must operate with a margin of 10%.
The government is also in the process of finalizing national regulations for the sector.
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