Microfinance institutions (MFIs) may finally have something to cheer about. The Reserve Bank of India (RBI) on Wednesday said it is considering a proposal from banks to allow them to restructure loans to the sector, without classifying the assets as non-performing.
According to RBI norms, banks can restructure standard assets, but they have to be treated as sub-standard and require provisioning. A decision will be taken as soon as the Indian Banks’ Association comes up with a detailed proposal.
Restructuring the loans is expected to help avert defaults, which could turn loans into non-performing assets. At a meeting here on Wednesday with top banks, RBI also advised them not to choke funds to MFIs.
Shares of SKS Microfinance — the only listed MFI — rose 8.5% on Wednesday to Rs 664.05 on the Bombay Stock Exchange, against a previous close of Rs 612.15. The scrip had slipped to a 52-week low of Rs 559 in trading on Tuesday.
Bankers attending the RBI meeting said collections by MFIs in Andhra Pradesh have deteriorated considerably and that there were some incipient signs of the contagion spreading to other states. As far as banks’ exposure to MFIs was concerned (estimated bank credit to MFIs: Rs 20,000 crore) repayment obligations have been met so far, but may be a concern going forward.
| INTERIM RELIEF |
| * Restructuring MFI loans will help avert defaults |
| * AP recovery fall is seen spreading to other states |
| * Banks want rescheduling of exposure to MFIs |
| * Restructuring will let MFIs rework their practices |
The general view among banks was that while structural issues in the MFI sector may be addressed by the Y H Malegam Committee set up by RBI, some interim measures may be required to address the gap between recoveries by MFIs and their payments to banks.
Banks stressed the need to work out an interim arrangement involving the rescheduling of exposure to MFIs, subject to certain covenants such as the institutions agreeing to reduce their leverage and growth projections.
Restructuring under a special dispensation would give MFIs some breathing space to rework some of their business practices. RBI had recently approved a similar restructuring of loans to the aviation sector.
“In view of the crucial role MFIs play in financial inclusion, RBI has asked us to ensure continued support to them,” a senior public sector bank executive who attended the RBI meeting said.
Alok Prasad, chief executive of The Microfinance Institutions Network said the organisation has communicated to its members that repayments should meet contractual obligations.
MFIs play a crucial role in last-mile connectivity for financial inclusion due to their network and relationships. Loans to microfinance bodes are treated as priority-sector lending by private and foreign banks that have a thin presence in rural areas.
But MFIs have come under fire for charging high rates of interest and using harsh recovery practices.
RBI’s Malegam panel is currently studying issues and concerns in the microfinance sector. The panel will review the definition of ‘microfinance’ and ‘microfinance’ institutions to regulate non-banking finance companies undertaking microfinance. It will also examine interest rates, lending and recovery practices
Last week, the Andhra Pradesh government asked RBI to ban MFIs from accessing capital markets. In its representation to the committee, the state government called for a statutory cap on interest rates being charged by MFIs.
