Banks quarrel over MFI debt recast

ICICI wants inclusion of securitised loans, while Axis, IndusInd and YES Bank oppose this.

Banks which lend to microfinance institutions (MFIs) are fighting among themselves over restructuring these loans.

Some banks, including ICICI, want to restructure securitised advances along with other loans. This is being opposed by Axis Bank, IndusInd Bank and YES Bank.

Industry sources say banks with a high share of securitised microfinance loans have requested the Reserve Bank of India (RBI) to treat these on a par with other microfinance loans for restructuring. They fear that without restructuring, these loans will become non-performing.

Microfinance companies are facing a crisis after a crackdown by the Andhra Pradesh government last year in response to allegations they were charging high rates and using coercive recovery practices. This led to a steep fall in their collections. The state accounts for a third of the microfinance loan market.

“Securitised pools are treated as sales. Technically, they cannot be restructured with other loans. This will increase the liability of our microfinance clients and hit their repayment capacity further,” said a senior official of a Mumbai-based private sector bank.

An email to ICICI went unanswered.

In securitisation deals, an MFI transfers a part of its loans to a special purpose vehicle, which issues securities that are subscribed by banks and other financial institutions. This ensures higher liquidity for the MFI and helps banks meet priority sector commitments.

Analysts say if securitised loans turn into non-performing assets, banks’ provisioning requirements will rise and their earnings will be hit.

“MFIs’ loans, once converted into non-performing assets, can impact provisioning and balance sheets,” said Sachin Sondhi, leader, strategy and operations, Deloitte.

Microfinance companies are also opposed to ICICI’s proposal. “This is a bit unusual, as once the asset sale takes place, the risk is transferred. Also, at this point in time, there is no agreement among the bankers,” said Alok Prasad, chief executive officer, Microfinance Institutions Network, the apex body of MFIs.

A senior IndusInd Bank official said some banks had sought RBI’s intervention. “We have objected because securitised pools are liabilities of banks and not MFIs. We have sought regulatory clarity before the restructuring can be done,” the official said.

The Indian Banks’ Association, which represents banks, has initiated talks with RBI.

RBI has extended the deadline for restructuring microfinance loans from March 31 to June 6. The lenders expect a decision before the deadline.

The approval of 70 per cent lenders is a must for the restructuring proposal to go through.