Urge RBI to temporarily relax banks’ provisioning requirements and avoid classifying loans given to them as bad assets.
Micro Finance Institutions Network (MFIN), the industry body of micro-lenders, has urged the Reserve Bank of India (RBI) to temporarily relax banks’ provisioning requirements for restructuring the debt of five microfinance companies that have not participate in the recast programme last year.
In case RBI allows this, banks will not have to classify these loans as bad assets and will avoid higher provisioning requirement.
According to industry players, Basix, SWAWS Credit Corporation, Cresa Financial Services, Dovefin Micro Finance, and Nano Financial Services are looking to restructure their bank loans. The micro-lenders that have sought debt restructuring have majority of their business in Andhra Pradesh, where a law in October 2010 banned weekly repayment from borrower. This which curbed micro lending and shrank loan recoveries.
These firms did not participate in last year’s microfinance debt restructuring programme that saw five other micro lenders — SHARE Microfin, Asmitha Microfin, Spandana Sphoorty Financial, Trident Microfin, and Future Financial Services — recast Rs 5,000 crore of loans.
“The initial reaction from the regulator to our proposal has not been negative. RBI may consider debt restructuring through a special dispensation like last time for these companies,” Alok Prasad, chief executive of MFIN, told Business Standard.
Typically, when banks restructure loans, the asset classification drops a notch. So, if a loan is classified as standard asset, it will turn sub-standard after restructuring and banks will have to make higher provisioning on these.
In January 2011, RBI said it would allow banks to restructure loans of microfinance companies without any change in asset classification, as these firms were not able to service their debts because of the change in lending norms in Andhra Pradesh that affected their profitability.
Initially, the central bank said this dispensation would be granted till March 31, 2011 but later extended it till June 6.
Industry players said many banks are not keen to again restructure loans of microfinance institutions as this dispensation was no longer available and a recast would increase their provisioning burden.
According to K Rahul, chief financial officer of SWAWS, the micro-lender did not participate in the restructuring programme last year as it expected the operating environment to improve and the company would be able to raise additional funds to sustain its operations.
However, the continued uncertainty in microfinance space has now prompted SWAWS to request its lenders restructure debt worth Rs 100 crore. The micro-lender is yet to convince 75 per cent of its lenders.
According to the norms, at least three-fourth of the lenders have to agree for restructuring the debts of a corporate entity. Debt recast is also possible if banks with more than 60 per cent share in the loan value agree to the restructuring proposal.
Basix, the country’s oldest microfinance institution, promoted by social entrepreneur Vijay Mahajan, has also approached banks to restructure Rs 800-crore of loans.
“We have requested MFIN to include our name in the list of microfinance companies seeking to restructure loans,” V Prabhudas, MD and chairman of Cresa, said.
He added that relaxation of provisioning needs will certainly encourage banks to recast loans.
