The plan of microfinance institutions (MFIs) in Andhra Pradesh to restructure debts is yet to find favour with banks, as lenders are not convinced with the proposal of converting a part of their advances into equity.
According to industry players, while banks have rescheduled the repayment period of at least three micro-lenders they have not agreed on debt restructuring, which includes conversion of a part of the loans into shares.
“Some of the large banks are yet to agree to our proposal on restructuring debt. Though, they have not rejected it. The discussions are still on. Banks are not comfortable with converting a part of the loans into equity. There are also concerns that these loans will attract higher provisioning after restructuring,” said K Rahul, chief financial officer of SWAWS Credit Corporation, a Secunderabad-based microfinance company.
SWAWS currently has about Rs 100 crore loans outstanding to 14 banks, which it plans to restructure. The promoters had offered to give up their majority stake in the company to banks by converting 25 per cent of the loans into shares.
In case of Cresa Financial Services, a micro-lender in Rajahmundry, banks have agreed to extend the loan repayment period but did not allow conversion of 50 per cent of its loans into equity.
“Bankers have agreed to tweak the tenure of the loan. But unless the CDR (corporate debt restructuring) cell admits the loan restructuring plan conversion of debt into equity is not likely to happen," Prem Kiran, director at Cresa Financial Services, told Business Standard.
Hyderabad-based Nano Financial Services has also rescheduled repayment tenure of some of its loans by up to 36 months but has not turned any of its debt into equity.
Bankers said they were reluctant to change loans into shares, as it does not ensure they would be able to recover their dues.
“What will be the exit options? How will banks monetise their stake if the loans are converted into shares? Private equity investors are no longer interested in the Indian microfinance story post Andhra Pradesh crisis. It does not make sense for banks to convert loans into shares for small microfinance companies," said an official with a private bank familiar with the development.
A senior official of Small Industries Development Bank of India (Sidbi) also confirmed the development saying that the lender has not agreed to convert some of its microfinance loans into equity so far. Sidbi will discuss the issue with other banks before deciding on any conversion.
"We need clarity on the exit route. Some arrangements are needed to ensure that either the promoters or some other strategic investors will pick-up the equity from us," the official said.
Industry players said banks were also worried that if one lender does not agree to conversion it will get its dues before the others who converted their loans into shares.
Five microfinance institutions – Basix, SWAWS, Cresa, Nano, and Dovefin Micro Finance – that did not recast their loans last year had approached their banks towards the end of 2011 to restructure their loans.
“Banks will be interested in conversion probably only in case of Basix as it is the largest among the five microfinance companies. Others may find it difficult to convince banks,” said an industry analyst.