Curious case of Dasaratha Reddy

Banks may have provided a breather to micro finance institutions (MFIs) by giving up their demand on promoters’ personal guarantee. But the final agreement has raised hackles for G Dasaratha Reddy, promoter and managing director of Future Financial Services, a micro lender from Andhra Pradesh.

Reddy was the first and only promoter who had agreed to banks’ demand for personal guarantee for restructuring of the debts of MFIs. Now, with the banks giving up the demand for in case of four MFIs, Reddy feels he has got a raw deal.

“My letter of approval mentions that there will be a personal guarantee from the promoter. This is because I had agreed to their (banks’) demand,” he said. The corporate debt restructuring cell sends a letter of approval after a date for the debt recast package has been agreed upon between the lenders and the borrowers.

“Fortunately, I have not signed the approval letter. I’m going to raise objections and demand a waiver of the personal guarantee in my case. The terms and conditions for restructuring debts cannot be different for different companies from the same sector,” he added.

Banks were initially pressing for personal guarantee of MFI promoters because it would minimise the risk of default in the restructured debts. However, in a bid to prevent about Rs 6,400 crore loans from turning into non-performing assets as most of the MFIs had raised objection to this demand, the lenders decided to give up their demand.

The lenders have asked the MFI promoters to pledge their entire shareholding. The debt restructuring package approved for Future Financial also mentions pledging of promoters' shareholding. “In my case, there is both personal guarantee and hypothecation of shares. I am going to write a letter to the Corporate Debt Restructuring (CDR) committee raising this issue,” Reddy said. It is not that banks are not aware of the situation.

“The CDR cell will consider any request made by the MFI, which has agreed to provide personal guarantee of its promoters. So far, we have not heard from them,” a senior official from the CDR committee said.

However, some bankers said, since the deadline for finalising the debt recast package expired on Monday, as mandated by the Reserve Bank of India (RBI), all lenders involved would need to respond quickly to resolve the issue.

“To revise the terms, to the best of my knowledge, the company has to give a fresh application. This will be reviewed by the CDR committee, lenders have to agree and then only the application will be processed,” a senior official of a Mumbai-based private sector bank involved in MFI debt restructuring programme said.

RBI set June 6 as the deadline for finalising the debt restructuring programme of MFIs. The CDR cell has admitted Rs 98.95 crore loan given to Future Financial for restructuring purpose. The company’s total debt is estimated at around Rs 159.54 crore.