Money & Banking

Banks in a huddle to re-jig loans to microfinance cos

K. Ram Kumar Mumbai | Updated on February 17, 2011


Fear loans may become ‘sub-standard' as AP collections drop

With their loans of around Rs 3,500 crore to seven large micro-finance institutions at stake in Andhra Pradesh, 27 banks and a financial institution have organised themselves into seven groups to take decisions on restructuring these loans.

Loans given by banks and Small Industries Development Bank of India (SIDBI) to SKS Microfinance, Spandana Sphoorty Financial, Share Microfin, Asmitha Microfin, Bhartiya Samruddhi Finance (Basix), Trident Microfin and Future Financial Services have been taken up for restructuring, based on their exposure as at December-end 2010.

Bankers fear that most of the Andhra Pradesh-based MFIs may fail to meet repayment obligations after Feburary 2011, as collections have dropped to 20 per cent in the southern State. Banks have also stopped fresh lending to this sector.

“If timely restructuring of MFI loans is not done, then most of the MFI accounts having exposure in Andhra Pradesh will slip into the sub-standard category. This could have adverse implications with regard to provisioning and profits,” said a senior banker.

Seven groups

Each of the 27 banks, including State Bank of India, Central Bank of India, Indian Overseas Bank, Andhra Bank, ICICI Bank, HDFC Bank, and Citi Bank, are members of up to five groups formed for restructuring the MFI loans. SIDBI is a member in all the seven groups.

After talking to MFI managements, scrutinising their cash flows, records and finalising the covenants (which will include infusion of fresh equity by promoters), banks will be framing the restructuring package by reducing interest rates, rescheduling repayments, converting debt into equity/preference shares and also consider incremental funding.

Collection dipS

Collections are faltering in AP as the Andhra Pradesh Microfinance Institutions (Regulation of Moneylending) Act, 2010, permits repayment of loans only at Panchayat Offices.

Prior to October 2010, MFI agents could visit the borrowers at their homes to make recoveries. The Act was passed by the State Assembly last December to rein in the coercive recovery methods employed by some MFIs and also to cap interest rates.

Published on February 17, 2011

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