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Business News/ Politics / News/  Norms for AP microlenders eased
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Norms for AP microlenders eased

Norms for AP microlenders eased

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Mumbai: The Reserve Bank of India (RBI) on Friday relaxed provisioning norms for microfinance institutions (MFIs) that have significant exposure to small borrowers in Andhra Pradesh, allowing them to set aside money for bad loans over a period of five years.

The deadline for making such provisions for bad loans was 31 March 2013. Had the regulator stuck to the deadline, this would have eroded the capital of many MFIs that have piled up massive bad loans, with a bulk of the borrowers in the southern state turning defaulters. They need to set aside money or make provisions for loans where borrowers have not paid for six months.

“...the provisioning made towards AP portfolio shall be notionally reckoned as part of NOF (net owned funds) and there shall be progressive reduction in such recognition of the provisions for AP portfolio equally over a period of five years," RBI said in a statement.

Accordingly, if an MFI makes a 100% provision for the Andhra Pradesh portfolio as on 31 March 2013, this will be added back notionally to NOF for capital adequacy purposes as on that date.

This add-back will be progressively reduced by 20% each year up to March 2017, RBI said.

MFIs are required to keep a 15% capital adequacy. This means for every 100 loan, they need a capital of 15.

MFI lend small loans to low-income borrowers at 24-36% and mainly source money from banks to do business.

Indian microlenders plunged into a crisis when Andhra Pradesh and then the largest market for MFIs, passed a controversial law in October 2010 that sought to rein in MFIs. This was due to reported coercive activities by some MFIs to recover loans from borrowers.

The law barred MFIs from giving a second loan to an existing borrower without government approval, lengthened the loan recovery cycle, and barred MFIs from approaching the doorstep of customers.

Following this, most MFIs witnessed massive defaults in loan repayment by their borrowers and many of them started withdrawing from Andhra Pradesh.

Analysts and senior industry officials said the relaxation will enable MFIs with large exposure to the southern state to survive.

“Effectively, MFIs now have five years to continue with the AP portfolio. This time should be sufficient enough for them to recover AP assets or write off the portfolio," said Kishore Kumar Puli, managing director and chief executive of leading microlender Trident Microfin Pvt. Ltd.

As at end-March, the firm had a loan book of 140 crore, of which 110 crore was stuck in Andhra Pradesh. In the backdrop of more regulatory clarity, MFIs expect commercial banks, which have largely stayed away from the sector so far, to resume lending to the sector, Puli said.

A senior executive of a public sector bank agreed. “It appears that there is more certainty as far as the future of AP-based MFIs are concerned. One can expect more fund flow to the sector," the executive said. He did not want to be named.

RBI has also allowed MFIs to consider only assets originated after 1 January 2012 to comply with the qualifying assets criteria. According to RBI norms, not less than 85% of the total loans of any MFI should count as qualified assets that are necessary for them to qualify for the status of a non-banking financial company (NBFC) MFI.

Also, MFIs can lend at least 70% of their loans for income-generating activities against 75% earlier, RBI said. This will enable microlenders to lend the remaining 30% for other purposes such as housing repairs, education, medical and other emergencies.

“Technically, they (MFIs in Andhra Pradesh) can survive as the net worth will not be negative as they can show this money to calculate their funds. But getting fresh funding may be difficult," said Santosh Singh, an analyst with Mumbai-based brokerage firm Espirito Santo Securities India Pvt. Ltd.

To ensure a cost benefit for borrowers, RBI capped the margins for MFIs with above 100 crore loan book at 10%, while the margin has been kept at 12% for smaller ones.

“This measure will ensure that in a low-cost environment, the ultimate borrower will benefit, while in a rising interest rate environment, lending NBFC-MFIs will have sufficient leeway to operate on viable lines," RBI said.

Besides, all new MFIs will require minimum funds of 5 crore while existing companies will have to achieve 5 crore net owned funds by 31 March 2014.

dinesh.u@livemint.com

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Published: 03 Aug 2012, 10:51 PM IST
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