With just over a fortnight left for banks and microfinance companies to agree on the debt recast package, the corporate debt restructuring (CDR) cell has said personal guarantees on loans are mandatory for promoters of micro lenders. The loan-restructuring programme has to be finalised by June 6, and the Reserve Bank of India (RBI) is unlikely to extend the deadline.
The announcement of the new requirement has raised fears that efforts to restructure debts of microfinance institutions may turn futile, since promoters of these companies have vehemently opposed the move.
About a third of the Rs 18,000 crore lent by banks to the microfinance sector has been admitted for restructuring. Analysts said if the restructuring programme did not materialise, the non-performing loans on the balance sheets of banks would expand significantly.
“All banks have unanimously agreed that the personal guarantee clause should be made mandatory. The chairman of the CDR cell ended the proceedings by saying ‘personal guarantee is must’. There would be no further discussions on this issue,” said a senior official of a private bank involved in the debt restructuring programme.
Another banker confirmed the development, saying promoters of microfinance institutions will now be informed of the decision. “Padmaja Reddy (managing director of Spandana Sphoorty Financial) was present in the meeting. We will also inform promoters of other microfinance companies,” he said. “I don't see any problem because one microfinance institution, Future Financial Services, has already agreed. Others will also have to accept this clause,” the banker said. G Dasharath Reddy, promoter of Future Financial, said he had agreed to offer a personal guarantee on the company's loans that are being restructured.
Most microfinance institutions, however, refuse to relent. “Nothing has been decided yet. We are in talks with our bankers and currently, we are working out the finer modalities of the proposed package. However, we are not in favour of the proposed stipulation asking promoters to provide personal guarantees,” Spandana Sphoorty said in an emailed response. Trident Microfin too, expressed doubts over the successful completion of the debt restructuring programme. “The CDR route will not be possible for us if personal guarantees are made mandatory,” said a senior Trident official.
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The CDR cell has admitted loans worth Rs 6,473 crore, involving five microfinance companies — Asmitha Microfin, Future Financial Services, Share Microfin, Spandana Sphoorthy Financial and Trident Microfin. Currently, the total debt of these companies is estimated at Rs 7,411 crore.
Bankers hope the status quo would be sorted out in the next meeting of banks and microfinance companies. “If debt restructuring does not materialise, both parties stand to lose. While microfinance companies would find it difficult to operate, the non-performing assets of banks would rise. We are confident this would be sorted out in the next meeting,” said a banker. “The personal guarantee clause is included because we want a commitment from promoters of these microfinance companies...I'm sure they would agree to it,” he said.