India: Banks Agree to Recast Rs. 400 cr Basix Loans
Mumbai, India, March, 04 2012 -
Banks have agreed to recast the Rs. 400 crore (80 million USD) loan of Bhartiya Samruddhi Finance Ltd (Basix), India’s oldest microfinance institution (MFI). Basix will be the sixth major microlender to resort to corporate debt restructuring (CDR) after a crisis hit the sector in the aftermath of a controversial state law in Andhra Pradesh.
The lenders met in Mumbai on Thursday and agreed to undertake the restructuring of the beleaguered firm. The proposal will be taken to the CDR cell by April, said Sushil Muhnot, chairman and managing director of Small Industries Development Bank of India (Sidbi)—one of the lenders to the MFI.
The CDR process, however, will be finalized only after the terms are agreed between the group of lenders and Basix at the CDR cell. “Banks met to discuss the proposal and agreed to take it to the CDR cell,” Muhnot said. Vijay Mahajan, group chairman of Basix, too, confirmed that banks have agreed to recast his firm’s loan.
Under CDR, banks normally extend the repayment period, offer a moratorium on repayment, and even reduce interest rates. Under the norms, at least 75% of the lenders, in terms of volume, need to agree on a loan recast. Basix had opted out of CDR in April last year, when Indian banks restructured around Rs.5,000 crore loans of five top MFIs in Andhra Pradesh, the largest market for such firms. SKS Microfinance Ltd, India’s lone-listed microlender, too, had done that.
While SKS had raised money through an initial public offer (IPO) in 2010, Basix opted out of CDR, expecting assistance from a group of private investors and banks including HDFC Bank Ltd, Corporation Bank and Axis Bank Ltd. But the firm had to eventually choose CDR to stay afloat in the business as it could not secure the funds.
Loans given to five firms—Trident Microfin Pvt. Ltd, Share Microfin Ltd, Asmitha Microfin Ltd, Spandana Sphoorty Financial Ltd and Future Financial Services Ltd—are being recast.
Banks had done the restructuring after the Reserve Bank of India (RBI) gave a special dispensation to them to do so without classifying these loans as non-performing assets (NPA).
The regulator does not want to give a special dispensation to banks for treating restructured loans as standard assets unless the loans are recast through the CDR for a group of firms. If the regulator sticks to its stance, banks will be required to set aside money even after the loan recast.
The microfinance sector plunged into a crisis after Andhra Pradesh, the largest market for micro-lenders, promulgated a law to control MFIs after a series of reported suicides due to the alleged coercive recovery practices followed by some of the MFIs.
The law prohibited MFIs from collecting money from borrowers weekly, doing doorstep business, and made it mandatory to secure government approval for every second loan given to a borrower.
The crisis, coupled with a statewide campaign against repaying money to MFIs, resulted in the collection rates of MFIs falling to 5-10% in the state, which, in turn, forced MFIs to stop giving fresh loans to borrowers.
Most of the microfinanciers in Andhra Pradesh had seen their loan book shrinking in the aftermath of the crisis. Basix saw its loan book shrinking to around Rs. 800 crore from around Rs. 1,800 crore in 2010. Out of this, around Rs. 400 crore is in Andhra Pradesh.
Analysts said getting CDR will help Basix to stay afloat in the business in the short-term, but the company needs to improve recoveries in its home market to continue receiving funding.
“It would have been difficult for Basix to survive without a CDR as it was not able to secure equity investments. In the short-term, it will help Basix to stay afloat in the space, as it doesn’t have to repay loans and make provisions,” Santosh Singh, analyst with Mumbai-based Espirito Santo Securities Ltd said. “But in the longer-term, the company needs to improve recovery of loan instalment from borrowers, as getting bank funding will be difficult otherwise.”