Mounting debt and depleting cash flow have put small and mid-sized microfinance institutions (MFIs) on the brink of bankruptcy, a situation where they do not have enough money to repay debt and meet day-to-day expenses.
According to the Microfinance Institutions Network (MFIN), a representative body, at least four small and mid-size MFIs are facing severe liquidity crunch, as they were out of the purview of corporate debt restructuring (CDR), which is being offered only to the top seven MFIs.
Some of the small and mid-sized MFIs with significant exposure in Andhra Pradesh include Nano Micro Finance, Cresa Financial Services, Dovefin Microfin and Swaws Micro Finance, said Alok Prasad, CEO, MFIN. Most of these had close to 70 per cent of their portfolios stuck in Andhra Pradesh, where a law last October had severely clamped fresh recoveries, which fell from almost 100 per cent a year before to less than 20 per cent at present.
“Though we were able to meet our contractual obligations to our lenders up to January 31, thereafter we were unable to keep our commitments. We are, with great difficulty, being able to service the interest portions to our old lenders. But in other cases we are not able to oblige both,” said V Prabhudas, chairman and managing director, Cresa Financial Services, an MFI based in Andhra Pradesh.
Cresa had already approached public sector banks to restructure its loans, and if approved, is to seek similar relief from private banks. As on March 31, the MFI had loan dues worth Rs 26 crore. “Even the regular overheads like staff salaries, office rent and maintenance are becoming burdensome to us due to this financial crisis. The future appears to be grim,” said Prabhudas.
In the case of Swaws Micro Finance, banks have restructured some of its loans for eight-year repayment, but if some action is not taken to improve cash flows, the MFI would be in liquidation over the next six to nine months, said Rahul K Kasinadhuni, chief financial officer. It has loan dues of about Rs 100 crore with financial institutions.
Swaws has already shed about 30 per cent of its work force to cut costs. According to its 2009 financial report, Swaws had staff of about 200 people. Opportunity International Australia, a non-profit organisation, had invested about Rs 10 crore, but was now “undecided on further equity infusion,” said Kasinadhuni . “There is a lot of urgency in the situation, and if some help is not provided in the next six to nine months, we might be under liquidation,” he said.
Nano and Dovefin could not be spoken to for confirming their financial position.
At least five MFIs had opted for CDR — Share, Spandana, Asmitha, Trident and Future Financial. “For smaller MFIs, the situation is worse, as their cash flows are severely impacted and no fresh lending is taking place. Effectively, they are no longer in business,” said Prasad. Under CDR,an indebted company is generally given relaxation in the repayment schedule and interest rate, on certain conditions like restriction on fresh lending and borrowing. The option is generally available only for MFIs with an equity component of at least Rs 15 crore.