Banks may turn MFI debts into pref shares

Banks plan to convert a part of their loans to microfinance institutions (MFIs) into equities if micro lenders fail to repay these debts even after restructuring, industry sources say.

The proposal to convert debts into redeemable preference shares at par in case of repayment default is currently being negotiated between the banks and MFIs, which have opted for debt restructuring.

While some micro-lenders are willing to accept the proposal, a few others are not very keen to admit this clause in the debt recast programme, which has been referred to the corporate debt restructuring cell.

“We are open to this idea. We are willing to convert about 50 per cent of our (restructured) debts into redeemable preference shares. This is because the sector is currently going through a crisis and even after restructuring it may be difficult for MFIs to repay the entire debt,” a senior official of Trident Microfin, a Hyderabad-based microfinance company, told Business Standard.

Trident’s total debt is estimated at Rs 149.17 crore, of which Rs 125.70 crore has been put forward for restructuring.

However, at least two other MFIs have opposed the move as they fear it will dilute the shareholding of investors.

“These demands are creating deadlocks and may stall the debt restructuring process. Our investors are not very comfortable with the idea of converting debt into equity. The repayment of existing loans depends on continuous release of fresh funds from banks,” a top official from another Hyderabad-based microfinance company said requesting anonymity.

The official said once the debt was converted into redeemable preference share, the MFI had to redeem these shares within the next six or seven years. “It may not be possible to redeem the preference shares through internal accruals and we may have to dilute our equity to raise funds to honour this commitment,” he added.

Bankers also confirmed the development.

“We are only saying there should be a provision to convert the debt into preference shares in case the microfinance institution does not repay its debts. As lenders, we should have some certainty of getting our money back,” said a senior official of a private sector bank.

In addition, the banks have also demanded personal guarantee from the promoters of MFIs and asked the stakeholders to share the burden of debt restructuring. Shareholders of microfinance companies have been asked to provide 15 per cent of the amount banks will sacrifice by charging lower interest rates on restructured loans.

There is a lack of unanimity among MFIs over these two proposals as well.

While the promoter of Future Financial Services, G Dasharath Reddy, has agreed to offer his personal guarantee, promoters of Share Microfin, Trident Microfin and Spandana Sphoorty Financial have rejected the idea.

Shareholders of Spandana Sphoorty, however, have agreed to give 15 per cent of the “sacrificed amount” to banks, which other microfinance companies have not agreed so far.

“Everyone is aware of the crisis in this sector. To raise additional funds at this point is almost impossible. We are still discussing the issue with the banks. Nothing has been finalised so far,” an official from a Hyderabad-based microfinance institution said.

The deadline to finalise the loan restructuring programme has been extended till June 6. For the restructuring to happen, MFIs and banks have to agree on the terms and conditions. At least 75 per cent banks by exposure or 60 per cent banks by guarantee have to be in favour of the proposals.

It has been proposed to charge interest at a rate of 12 per cent on restructured loans, which will have a moratorium of one year and repayment tenure of six years thereafter.