Debt recast seems the only option for cash-strapped microfinance institutions (MFIs) to secure funds, as banks and financial institutions continue to shy away from securitisation and purchase of loans.
While most microfinance companies fear debt restructuring would blemish their reputation and affect their credibility, limited availability of fresh credit, absence of securitisation deals and deteriorating liquidity have forced them to initiate talks on debt recast with bankers.
“The main problem with debt restructuring is that it damages your goodwill. It is the last resort. But given the current liquidity and banks' unwillingness to increase lending, most MFIs have resorted to debt restructuring,” said Mukul Jaiswal, managing director, Cashpor Micro Credit. He said the absence of securitisation deals have also added to the woes of micro-lenders. Cashpor, which lends to poor people in Bihar and Uttar Pradesh, sold Rs 18-crore loans to banks in the January-March period, compared with Rs 80 crore in the year-ago period. “The liquidity crunch is hurting our growth plans,” Jaiswal said.
Hopes of improved liquidity in the MFI sector rose after SKS Microfinance, the country's largest micro-lender, said it had successfully securitised Rs 610-crore loans with some banks and a non-banking finance company (NBFC) last month. SKS said these were the first securitisation deals since the Andhra Pradesh government had introduced a new act to regulate the sector. The company said that it would not participate in the corporate debt restructuring mechanism, since it was comfortable with its current liquidity.
Through securitisation deals, an MFI transfers a part of its loans to a special purpose vehicle, which issues securities subscribed by banks and other financial institutions. This helps the MFI enhance its liquidity and aid banks to meet their priority sector commitments. Apart from securitisation, MFIs also sell their loans to banks and NBFCs directly.
Industry players, however, say SKS' securitisation deals were exceptions and only a handful of such transactions happened in the last quarter. “The base rating for the whole sector has been downgraded, given the uncertainty over regulations. Rating becomes very crucial in any securitisation deal. SKS and Basix being industry leaders, get a good rating. But it is not the same for the rest of us,” a senior Asmitha Microfin official said, requesting anonymity. Asmitha, which is headquartered in Hyderabad, has about Rs 1,200-crore debts. “We are looking at restructuring as an option, as banks are not ready to give additional loans,” the official said.
Share Microfin, another Hyderabad-based micro-lender, has also opted for debt restructuring, said its managing director, M Udaia Kumar.
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MFIs pointed out the securitisation transaction costs have made some of these deals unviable for microfinance companies. “Deals are more expensive and MFIs are looking at debt restructuring to avoid liquidity crunch,” Jaiswal of Cashpor Micro Credit, said. Industry players estimate the rise in discount rate, or the cost of securitisation transactions, at 11.5 per cent.
Spandana Sphoorty Financial said it was offered a securitisation deal by Kotak Mahindra Bank, but was not keen to accept the offer. “We have about Rs 2,700-crore debts and are yet to decide if we will go for restructuring. We are still discussing this issue with our lead bank, ICICI Bank,” Spandana's founder and managing director, G Padmaja Reddy, said.
“It (securitisation) is a February-March event. Further transactions are unlikely in the next six months,” said Alok Prasad, chief executive officer, Microfinance Institutions Network, the apex body for MFIs in India.