It may be the final nail in the coffin of small and mid-sized micro-lenders in Andhra Pradesh. These firms, already battling mounting losses and rising non-performing assets, say they will have to shut shop as higher provisioning needs, mandated by the Reserve Bank of India (RBI), will wipe out their net worth.
The RBI had said on Friday that a non-banking finance company microfinance institution (NBFC-MFI) would have to make 100 per cent provisions on aggregate loan instalments overdue for 180 days or more. The new norms are effective from April 1, 2012. In the existing guidelines, MFIs have to maintain a provision of 10 per cent on the loan amount, where repayment is due for more than 180 days.
“This is a huge blow. In Andhra Pradesh, 70 per cent of our receivables are due for more than one year. If we have to make 100 per cent provisions on these instalments instead of 10 per cent, we’ll not be able to meet the minimum net worth criterion of ~5 crore,” said the promoter of a Hyderabad-based micro-lender.
The official said small and mid-sized micro-lenders in the state would also find it difficult to maintain the capital adequacy ratio, which has been relaxed for MFIs in Andhra Pradesh for the current financial year. The RBI has said MFIs that have more than 25 per cent of their loan portfolio in Andhra Pradesh will be allowed to maintain a minimum 12 per cent capital adequacy in 2011-12 instead of 15 per cent.
“It will be difficult to meet the new provisioning norms. We hope the RBI will give us a special dispensation and will not increase the provisioning needs,” said Kishore Kumar Puli, CEO of Trident Microfin.
According to industry players, loan recoveries in Andhra Pradesh have come to a standstill after the local government passed a law in October 2010 curbing micro-lending activities in the state. Since the new legislation, the size of the microfinance industry has shrunk by Rs 10,000 crore and a majority of receivables in Andhra Pradesh are now overdue for more than a year.
"We have discussed this issue in our board. If 100 per cent provisioning is needed, many MFIs, including the large ones in Andhra Pradesh will have to close their business. We have to make a representation to the RBI through our industry association and ask for relief," said G Dasaratha Reddy, chairman and managing director of Future Financial Services.
Industry players said they planned to restructure their own loan portfolios in Andhra Pradesh and approach the regulator for relief on provisioning of the restructured credit portfolio.
Micro Finance Institutions Network (MFIN), the industry body for micro-lenders in India, also expects the RBI to offer Andhra Pradesh-based MFIs some concession on the provisioning requirements.
"The introduction of NBFC-MFI is a fulfilment of a long-standing industry demand. The dialogue will carry on. It is our strong expectation the RBI will be agreeable to regulatory forbearance in the context of the provisioning requirement for Andhra Pradesh portfolios," said Alok Prasad, chief executive officer of MFIN. Some micro-lenders said while they were awaiting clarity from the central bank, they expected the new provisioning norms to be applicable only on fresh loans. "Our interpretation is that since it comes into effect from April 1, 2012, it will be effective on new loans and the existing portfolio may be grandfathered," said S Dilli Raj, chief financial officer of SKS Microfinance.
He clarified that SKS's provisions were higher than the regulatory requirement and it had a healthy capital adequacy ratio to weather the increased provisioning needs.
"Clearly, there is a need for a dialogue on the provisioning requirement around the Andhra Pradesh portfolio. This is a unique requirement for Andhra Pradesh-based MFIs," said Mathew Titus, executive director of Sa-Dhan, an association of MFIs.
