Corp Bank seeks equity in MFIs in case of default

The troubled microfinance industry may have left most banks cagey about lending to the sector but state-run Corporation Bank has come up with a novel way of guarding its risks by securing equity in the company in case of default.

"The microfinance industry (MFI) is a very lucrative sector and we consider it very good from the investor perspective...From now on, we will be putting a clause in our loan contracts through which we will get an equity stake in the MFI in case of a default," the Mangalore-based lender's Chairman and Managing Director Ramnath Pradeep told reporters on the sidelines of the annual Bancon here today.

The 'equity for loan' clause mentions that the stake will have to be given to the bank at par or at the face value of every share, which can result in a windfall to a bank, Pradeep said.

"MFI shares are still strong. The share's market value can be Rs 700 but I will get it for Rs 10 (the face value)," he explained.

Bank lending to MFIs has dried up following concerns over high interest rates of around 30 per cent or above being charged by these micro-lenders. Following a spate of suicides by harried borrowers in Andhra Pradesh, which is the largest MFI market in the country, the state government had in October issued an Ordinance to regulate MFIs, adding more salt to the injury.

Following this, the Centre is mulling a legislation to regulate the MFIs, while the Reserve Bank has appointed the YH Malegam panel to study the issue and bring the non-regulated MFIs under the RBI's regulatory purview.

Following the troubles in Andhra, many banks have gone on record to the state that they will not be lending to MFIs till the current crisis gets resolved, or they bring down or cap their interest rates at 24 per cent, while the only listed entity from the space, SKS Microfinance, recently gave a statement saying recent events may have material impacts on the company.

Pradeep said Corporation Bank's current exposure to the MFI sector is around Rs 600 crore, which is not even a per cent of its overall exposure of Rs 69,000 crore, and added that no lending has yet been done under the equity-in-case-of- default clause.

"This applies to the newer ones which we will be giving," he added.