Allow banks to offer us fresh loans: MFIs to RBI

Crisis in MFI sector which began in AP in Oct 2010 has left micro-lenders with negative net worth

Microfinance companies, which restructured their debts in 2011, have requested the Reserve Bank of India (RBI) to allow banks to offer them fresh loans. The move follows the central bank turning down their request for a special dispensation to allow banks to restructure the loans for the second time, without changing the asset classification.

The crisis in the microfinance sector has left these micro-lenders with negative net worth. According to norms, banks aren’t allowed to give fresh loans to companies that have negative net worth.

“We have requested RBI to offer a special dispensation and allow banks to gives us fresh loans. Our lead banker has also written to the central bank, seeking permission. We are hopeful something positive would happen this time,” a senior executive of a microfinance company told Business Standard, requesting anonymity.

Five microfinance companies—SHARE Microfin, Asmitha Microfin, Spandana Sphoorty Financial, Trident Microfin and Future Financial Services—had restructured about Rs 5,500 crore of loans in 2011. While Future Financial Services has decided to opt out of debt restructuring, the other four microlenders are finding it difficult to revive their businesses.

In October 2010, the Andhra Pradesh government had introduced a law to curb the microlending activities of private companies, as it was alleged microlenders were charging exorbitant rates of interest and using coercive methods to recover money from poor borrowers. The new law impacted micro-lenders’ profitability, affected their loan recovery and turned their operations unviable.

Sources said bankers weren’t too keen to offer fresh loans to these microfinance companies, even if RBI agreed to grant the special dispensation.

“We have a significantly large portfolio in Andhra Pradesh. When we had decided to restructure our debt (in 2011), we had assumed there would be some improvement in the recovery rate.

But there has been no improvement at all. Our bankers are not willing to offer more loans, even if RBI gives them the permission. We may have to shift our business to another state if this situation continues,” said the chief executive of one of the four microfinance companies.