Mumbai: Afew large microfinance institutions (MFIs) are trying to cope with a funding squeeze that followed a crisis after Andhra Pradesh introduced a stringent law governing microlenders nearly eight months ago, which saw assets of some MFIs drop by at least one-fourth.
Bhartiya Samruddhi Finance Ltd (BSFL), for instance, is focusing on fee income to tide over the crisis, and SKS Microfinance Ltd plans to diversify its business and start offering gold loans in a big way.
Most MFIs are also seeing their net worth being eroded due to mounting bad loans in the southern state, and the scenario may worsen on account of write-offs, industry officials said.
“You could see the erosion (in loans and net worth) happening due to write-offs," an MFI official said on condition that neither he nor his firm be named.
MFIs extend small loans to poor borrowers at a rate of 26% or above, typically for a year.
More than one-fourth of the industry is concentrated in Andhra Pradesh, which promulgated a law in October restricting the operations of microlenders. This led to a drastic rise in their bad loans as borrowers stopped repaying debt.
The loan book of BSFL, an MFI promoted by Vijay Mahajan-led Basix group, has shrunk to ₹ 1,117 crore from ₹ 1,808 crore in September, when the crisis hit the industry.
Since then, its net worth has dropped to ₹ 201 crore in May, from ₹ 229.4 crore in September, as the company had to provide for its mounting bad loans, drawing down from its reserves.
During the period, BSFL’s share of loans in Andhra Pradesh to its total loan book also rose sharply—around 35% as against 31% in September—due to the shrinkage in its loans outside the state, which came down to ₹ 727 crore from ₹ 1,244.8 crore.
BSFL is one of the two large MFIs in the state that opted out of a corporate debt restructuring (CDR) offered by Indian banks after the Reserve Bank of India permitted banks to recast loans of around ₹ 5,000 crore without terming them as bad loans. The other is SKS Microfinance, India’s only listed MFI.
CDR is a process through which banks either extend repayment term or write off a part of loans to help a troubled firm.
SKS, too, has seen its loan book contracting to ₹ 4,111 crore in March from around ₹ 5,000 crore in September last year. Its Andhra Pradesh portfolio, which has declined steadily, now forms about 20% of its loan book, as against 26% in late last year.
Its repayment rate, or the rate of collection of loan instalments from borrowers, in the last quarter stood only at around 10.5% in its home state, far below the over 97% prior to the crisis.
According to Dilli Raj, chief financial officer of SKS, the firm has chalked out plans to diversify its operations largely into gold loan business in view of the current market scenario.
SKS plans to open around 200 branches across India by March to broad-base the company’s revenue stream, he said.
“We are diversifying our operations and gold loan business will be a major focus. We hope to achieve at least ₹ 200 crore business from this segment by March," Raj said. As of now, the company has only five branches dedicated to gold loan business with the portfolio size of around ₹ 1 crore, he added. Also, SKS plans to disburse around one million loans to its own members to purchase mobile phones with a ticket size of ₹ 2,100, he said. In fiscal 2011, the company disbursed 350,000 such loans.
MFIs that were admitted to CDR in Andhra Pradesh include Trident Microfin Pvt. Ltd, Share Microfin Ltd, Asmitha Microfin Ltd and Spandana Sphoorty Financial Ltd.
Mahajan said the CDR package is unlikely to significantly help these firms to regain business momentum unless fresh funding starts flowing again.
“CDR is an NPA (non-performing asset) in banks’ book, which it writes as standard assets. I don’t think that CDR will help MFIs (unless fresh funding is available)," he said.
MFIs, which have been admitted to CDR, may also see banks taking significant control over their operations, including appointment of key executives and monitoring of daily cash flows.
For instance, a group of banks led by Indian Overseas Bank have already agreed to acquire 72% stake in Trident Microfin by converting debt into direct equity, said Puli Kishore Kumar, managing director and chief executive officer of Trident, which is based in Hyderabad with a loan book of ₹ 136 crore to 200,000 customers.
Dismissing any imminent crisis in BSFL, Mahajan said the firm is on course to regain business momentum by maintaining the quality of loans and slow overall growth to overcome the difficult phase.
“CDR is not the right solution for us. We are focusing to maintain the (loan) portfolio quality and moderate growth in other states," said Mahajan. “Our non-credit income (fee-based income) has gone up to around 25% from 18% a few months back and this is saving us."
Experts say Mahajan’s company could face serious issues in the period ahead, unless it manages to secure fresh funding. “Basix has seen its net worth eroding in the recent months. The repayment rate in Andhra Pradesh is pretty low," said a banker based in Hyderabad.
“Post June, they will have to do serious write-offs, which will again erode net worth. If the Andhra Pradesh portfolio is not coming back, the company may face serious issues, although it may not happen immediately," he said, requesting anonymity.
Other MFIs such as Spandana and Share have also seen significant decline in assets and net worth shrinking, although the issue may not be as severe for them due to temporary relief in the form of one-year moratorium or the conversion of debt into equity, according to him.
Mint couldn’t reach these firms immediately. Chief executives of both firms did not take calls.