Banks, MFIs reach debt recast deal

MFI promoters agree to pledge 100% shareholding; banks refuse to give fresh loans to the sector.

The promoters of microfinance institutions (MFIs) have agreed to pledge their entire shareholding with banks that have given them loans. This will be done as part of a debt restructuring programme.

The banks were earlier demanding personal guarantees, to which the promoters objected. The impasse was broken at a recent meeting between banks and MFIs.

Since the debt restructuring will now go through, about Rs 6,400 crore loans have been prevented from becoming non-performing assets (NPAs).

The Reserve Bank of India (RBI), which had allowed banks to recast loans of the troubled MFI sector without classifying them as NPAs, had given June 6 as the deadline for finalising the debt restructuring package.

“We have decided to waive the personal guarantee clause. MFIs now have to pledge 100 per cent promoters’ shares to banks,” a senior official of the Corporate Debt Restructuring (CDR) cell told Business Standard.

Banks, however, refused to give fresh loans to MFIs which the latter had sought for working capital needs.

The CDR cell admitted loans worth Rs 6,473 crore involving five microfinance institutions. A repayment period of six years is proposed, excluding a one-year moratorium. The rate of interest on restructured loans is 12 per cent.

Five MFIs — Asmitha Microfin, Future Financial Services, Share Microfin, Spandana Sphoorty Financial and Trident Microfin — which opted for the restructuring, had agreed, said senior bankers and top officials of these companies.

“We have agreed to pledge our shareholding. I’m more or less certain that the debt restructuring will happen now. It is a positive thing because if we are able to run our businesses profitably, we have the option of pre-paying the debt and getting our shares released. Our personal wealth is not at risk,” said a top official of a Hyderabad-based MFI.

Analysts say the deal suits MFIs because if their business is not running profitably, it will not be easy for banks to sell their shares.

“If personal guarantee was given, banks could have sold properties and assets of the promoters to recover their dues,” said an analyst with a domestic brokerage.

“There will be no fresh lending as of now. Bankers told us that it was difficult to convince their credit committees at this point in time to increase exposure to the sector,” said a top official of Spandana Sphoorty Financial.

But MFI officials are hopeful that bank loans will be available for business outside Andhra Pradesh. The Andhra Pradesh government recently banned weekly collections, which hit collection of dues by MFIs.

With MFIs agreeing to the new terms, the CDR cell is expected to send a letter of approval to the microfinance companies by Monday.

“We have not got the letter of approval yet. We are hoping to get it by Monday as that is the last day for approving the package. Once the letter of approval comes, it will take 90-120 days to implement the programme,” said an official of a microfinance company.