MFIs propose unique merger plan

The microfinance trio—Spandana Sphoorty Financial, SHARE Microfin and Asmitha Microfin—have proposed to merge their operations. This includes the setting up of three corporate entities, the waiver of capital adequacy ratio in one of the new entities and entry into new businesses, according to sources familiar with the development.

According to the plan for the biggest merger in the Indian microfinance space, after amalgamating their current businesses, the three Andhra Pradesh-based micro-lenders would jointly set up three companies. The first would manage the microfinance loans of Spandana, SHARE and Asmitha outside Andhra Pradesh. The majority of these loans are classified as performing assets and the recovery in this portfolio had not been affected by the recent crisis in the microfinance sector.

The second company would be responsible for microfinance loans disbursed in Andhra Pradesh. These are mostly bad loans, as recovery in this portfolio has been dwindling since the Andhra Pradesh government came out with stringent norms for the microfinance sector. The third company would manage new businesses like gold loans and tractor financing—key areas that the merged entities have recently started focusing on or are planning to foray into.

"Since October 2010, microfinance companies in Andhra Pradesh are facing problems in raising funds, even for those businesses that have not been affected by the crisis. This structure would ensure bank funding, at least for those businesses that are out of the crisis zone," said an official of one of the microfinance firms involved in the merger. The official requested anonymity, since the deal structure was not yet approved by the companies' shareholders and creditors.

The three microfinance firms also plan to approach the Reserve Bank of India (RBI), seeking the waiver of capital adequacy requirements for the company that would manage the bad micro loans in Andhra Pradesh. “Most of the microfinance loans in Andhra Pradesh have become non-performing. There is no expectation of cash flow from these businesses. Hence, we will request RBI to waive the minimum capital adequacy requirements for this company,” said another official.

The official added floating a company to manage microfinance loans in Andhra Pradesh has been suggested, since some recovery in this portfolio would take place once the situation in the state improved. “This will also help banks get their money back,” the official said. The Malegam committee had suggested microfinance firms should maintain a capital adequacy ratio of 15 per cent. For non-banking financial companies, the minimum capital adequacy ratio is 12 per cent.

Members of the senior management of both Spandana Sphoorty Financial and SHARE Microfin declined to comment, since regulatory approvals on the deal structure were awaited.

Sources said the merger was proposed to reduce multiple lending to the same borrowers and an overlap in businesses of the three microfinance firms. Bankers said there was no guarantee that the merger would sail through, especially because of the complex nature of the deal. The multiplicity of private investors in all the three microfinance firms have also raised doubts whether the shareholders would be unanimous in approving the merger.

“First, the shareholders of these three companies have to agree. Then, banks have to be convinced that such a merger would improve their earnings and help in the repayment of their existing bank loans. Then, you need regulatory approvals. Banks have only said they would review the proposal,” said a banker familiar with the development.

Sources said the three microfinance companies would be independently valued, to decide the shareholding in the merged entities. The names of the new entities have not been decided yet.