RBI gives breather to MFIs

Asks banks to recast unsecured loans without NPA classification.

The Reserve Bank of India (RBI) has asked banks to go easy on microfinance institutions (MFIs) by relaxing certain norms regarding loan restructuring. Banks can now restructure loans extended to MFIs even if they are not fully secured. As a special case, banks need not classify such loans as non-performing assets (NPAs).

“This relaxation was given considering the fact the problems afflicting MFIs were not necessarily on account of any credit weakness per se but mainly due to environmental factors,” RBI said in a note.

A top official of the Indian Banks’ Association said total lending by banks and financial institutions to MFIs was over Rs 20,000 crore. Over 85 per cent of the exposure was to six-seven large players. “Banks will subject larger MFIs to greater scrutiny for books, pricing and recovery practices,” said the official.

The ad hoc measures required the various banks financing an MFI to come together to restructure the package. The common approach would improve information sharing and discipline in MFIs as borrowers, the official added.

The restructuring will involve giving more time for repayment, a cut in interest rates, making some sacrifice on the amount due, asking MFI promoters to bring additional capital and commitment to restructure clients’ loans.

These measures are applicable only to standard accounts. When banks restructure unsecured credit, the account is treated as an NPA for one year and requires higher provisioning. As a special case, when restructured, the unsecured loans to MFIs would be treated as standard assets. This would save banks from making provisioning for NPAs.

RBI has advised banks to recycle the collections of MFIs. This translates into MFIs using the repayment amount for further lending and operational purposes.

These temporary measures are applicable to MFI loans restructured till March 31, 2011. RBI said this would help ease the liquidity crunch until action was taken on the recommendations submitted by the Malegam committee.

The committee was set up under Y H Malegam to study the issues specific to the MFI sector. The sector was hit hard, especially in Andhra Pradesh, after new norms regarding lending rates and collection practices were implemented. This led to shortage of funds with MFIs, in turn, affecting their borrowings from banks.