RBI rejects plea to treat loans to MFIs as standard asset on second recast

The Reserve Bank of India (RBI) has shot down a demand by the association of Micro Finance Institutions (MFIs) to consider its plea for treating loans extended to MFIs as standard assets even if they are restructured the second time.

"RBI does not stop a second time restructuring. But the asset qualification benefit will not be available for it," RBI deputy governor Anand Sinha told reporters on the sidelines of a conference on financial inclusion by the Federation of Indian Chambers of Commerce and Industry.

In 2011, banks restructured about Rs 6,000 crore worth of loans to some microlenders after RBI allowed them to do so without terming these non performing assets.

Microfinance companies including Bhartiya Samruddhi Finance, Spandana Sphoorty Financial Ltd, Trident Microfin Ltd, Share Microfin Ltd and Asmitha Microfin were the worst hit by a law promulgated by Andhra Pradesh in October 2010. The law made it difficult for them to issue new loans, and even more difficult to collect old ones.

The Microfinance Institutions Network had sought the permission of the RBI for a second round of loan restructuring. It wanted this corporate debt restructuring (CDR) facility, without its loans being classified as bad.

Banks refused to restructure the loans without RBI easing rules which require lenders to significantly increase the money they set aside for loans that are restructured twice. Under current norms, banks need to set aside 15 per cent of the loan amount as provision while restructuring a loan for the second time, treating it as a bad loan. CDR is a facility under which banks may extend the repayment period, cut interest rates, provide a repayment holiday (or moratorium), convert part of a loan into equity, even write down the loan amount.