Micro finance cos take cue from banks on loan recast

Microfinance institutions (MFIs) seem to have taken a leaf out of the banks’ debt recast programme for the sector to cap mounting bad loans in their own credit portfolio in Andhra Pradesh.

Top micro-lenders in Andhra Pradesh have approached the state government with a proposal to restructure loans given to poor borrowers. These firms have offered to reduce the rate of interest and increase the repayment tenure.

In return, MFIs in Andhra Pradesh want the government to relax the lending norms for the sector in the state.

“All of us, our industry association Micro Finance Institutions Network (MFIN), met the state government. We have proposed to restructure the loans that we have disbursed. The state government has assured us it will review our proposal,” Udaia Kumar, managing director of SHARE Microfin, a Hyderabad-based microfinance firm, told Business Standard.

The proposed loan restructuring will see micro-lenders in the state reducing the interest rate on existing loans to 15 per cent. The reduced rate of interest will be effective from the date of the ordinance passed by the Andhra Pradesh government in October to curb micro-lending in the state.

Even for fresh loans, microfinance institutions have offered to charge 24.55 per cent rate of interest and waive the processing fees.

The repayment tenure will also be extended for most of the borrowers. Micro-lenders proposed that for borrowers of loans up to Rs 15,000, the repayment period would be kept unchanged. For loans between Rs 15,000 and Rs 30,000, the tenure will be extended to 24 months. Loans between Rs 30,000 and Rs 50,000 could be repaid over 36 months while for loans above Rs 50,000, the repayment period would be 48 months.

“The state government has not committed it will accept our proposal. But, the fact that it's willing to review it is a positive development,” said the chief executive of another microfinance firm based in Andhra Pradesh.

The official, who requested anonymity, said the government may take a final decision on the issue in September.

“If our proposals are accepted, it will provide a Rs 1,500 crore relief to borrowers on interest payment. It will also help us recover Rs 5,000 crore of bank funds,” Kumar said.

MFIs have requested the state government relax lending norms like waiving the need for prior government approval for fresh lending to self-help groups and their members in the state.

Besides the Andhra Pradesh government, MFIs have also initiated talks with the Reserve Bank of India to allow them a special dispensation on provisioning of these restructured loans. The dispensation will allow micro-lenders not to make additional provisioning for these restructured loans.