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The prolonged crisis in the microfinance sector has left banks in a quandary and may turn Rs 5,500-crore loans into non-performing assets in the next few months.
Four microfinance institutions (MFIs) — SHARE Microfin, Asmitha Microfin, Spandana Sphoorty Financial and Trident Microfin — had restructured these loans in 2011. The micro-lenders have now requested banks to restructure these debts for a second time.
The MFIs were given a two-year repayment holiday, which is set to expire on June 30. However, micro-lenders claim they are not in a position to start repayment from the next month as the crisis continues in the sector. “When we opted for a debt restructuring, we assumed that there will be some improvement in the collection rate (in Andhra Pradesh). But there has been no improvement at all. We have requested banks for a second round of debt restructuring as we are not in a position to start repayment,” Kishore Kumar Puli, managing director of Trident Microfin, told Business Standard.
This has left banks in a difficult situation. If the repayment does not start, the loans will slip into the non-performing category after 90 days from June 30. Banks will then need to make 100 per cent provisions against these unsecured loans. Currently, these loans are treated as standard assets and the provisioning requirement is only 2.75 per cent.
On the other hand, if the loans are restructured again, they will be classified as sub-standard assets and will require higher provisioning.
Sector players said around 40 banks have lent money to these microfinance companies. Bankers have suggested they will be willing to restructure the loans for a second time if the Reserve Bank of India (RBI) allows them to treat these advances as standard assets.
“We had some preliminary discussions with banks. But the situation is still in a fluid state,” said R Jayasuriya, chief executive of Asmitha Microfin.
Sources indicate that some of the MFI chiefs have already made a representation to RBI for a special dispensation. The central bank had given such a dispensation when microfinance loans were restructured in 2011.
Micro-lenders have requested banks to offer them two more years of repayment holiday and asked the repayment period to be extended till 2020.
They have also requested banks to either infuse fresh equity or convert a part of the loans into compulsorily convertible preference shares.
About half of the Rs 5,500 crore loans were converted into optionally convertible cumulative preference shares, which were supposed to be redeemed at specific intervals. The first redemption is scheduled on June 30. But since the micro-lenders do not have surplus reserves, it is unlikely that redemption will happen anytime soon. Hence, for banks, these shares will be considered as non-performing investments, sector players said.
