Banks looking to restructure loans extended to six AP MFIs

Banks are planning to utilise the services of the tried and tested Corporate Debt Restructuring (CDR) Cell to quicken the restructuring of loans given to six Andhra Pradesh-based microfinance institutions.

The urgency to tap the CDR Cell stems from the fact that loans, aggregating about Rs 11,500 crore, given to the MFIs could turn sour if they are not restructured before the end of this month. Else, it could have consequences for them in terms of provisioning in the fourth quarter results.

MFIs in question

The MFIs whose loans are being restructured are: Spandana Sphoorty Financial (banks' exposure as of January-end 2011: Rs 3,326 crore); SKS Microfinance (Rs 3,044 crore); Share Microfin (Rs 2,402 crore); Asmitha Microfin (Rs 1,375 crore); Bhartiya Samruddhi Finance Ltd (Rs 1,263 crore); and Future Financial Services (Rs 159 crore).

Two lead institutions —- Small Industries Development Bank of India and ICICI Bank — have moved the CDR Cell on behalf of some 40 banks for restructuring their loans to MFIs.

The CDR Cell was floated by banks and financial institutions in 2001 as a joint mechanism to restructure debts of viable corporate entities affected by internal and external factors.

Restructuring package

The restructuring package that has been proposed by banks includes rescheduling existing loans (to be repaid fully within 10 years) at 12-12.50 per cent and extending fresh funding in the form of working capital term loan (WCTL) at 12 per cent interest, said a banker clued in to the developments.

As per the proposed restructuring package, Spandana Sphoorty Financial will get Rs 621 crore as WCTL; SKS Microfinance, Rs 41 crore; Share Microfin and Asmitha Microfin, Rs 89 crore each; Bhartiya Samruddhi Finance Ltd, Rs 75 crore; and Future Financial Services, Rs 34 crore.

Following reports of some MFIs resorting to strong-arm recovery tactics and charging usurious interest rates from poor borrowers, the Andhra Pradesh Government passed a law late last year, restraining the functioning of MFIs.

After the Andhra Pradesh Microfinance Institutions (Regulation of Money Lending) Act, 2010 was passed by the State Assembly, collections of MFIs have dipped to as low as 20 per cent, against over 95 per cent earlier.

The Act requires all MFIs to apply for registration before the Registering Authority of each district, specifying the villages or towns in which they have been operating (or propose to operate), the rate of interest being charged (or proposed to be charged), system of conducting due diligence and effecting recovery, and list of persons authorised to conduct the activity of lending or recovery of the money lent.

Further, it permits repayment of loans only at panchayat offices. Prior to October 2010, MFI agents could visit the borrowers at their homes to make recoveries.

COMMENT NOW