India: BSFL to get Rs. 800 cr funding from investors

Aug 2011
Mumbai, India, August, 09 2011 - Five equity investors will increase their combined stake in the microfinance institution to 58% from 43%.

A clutch of commercial banks and private investors have thrown a lifeline to India’s oldest microfinance institution (MFI) to save it from imminent closure.

Vijay Mahajan-promoted Bhartiya Samruddhi Finance Ltd (BSFL), popularly known as Basix, which nearly collapsed due to mounting bad loans, has received commitments worth around Rs. 800 crore from nine banks and private institutional investors—most of them existing investors—to help it stay afloat.

This is indeed a lifeline for us,” said Mahajan, who founded BSFL in 1996—eight years before SKS Microfinance Ltd, India’s largest and only listed microlender, set up shop as a non-banking financial company.

MFIs extend small loans to poor borrowers at 24-36% and source money from banks to do business. The industry, worth Rs. 20,000 crore in India, has been struggling since it started facing regulatory hurdles last year.

BSFL will receive Rs. 500-600 crore from commercial banks and Rs. 100 crore from five institutional investors—International Finance Corporation (IFC) Washington, Matrix Partners, Axis Bank Ltd, Hivos-Triodos Fund and Lok Capital Llc. Small Industries Development Bank of India (Sidbi) and HDFC Bank Ltd will give it Rs. 75 crore and Rs. 25 crore, respectively, as preference capital.

“This investment will help the company take its performing loan portfolio to Rs. 1,200 crore from Rs. 600 crore right now and to around Rs. 1,500 crore by December, provided things continue to improve,” Mahajan said. “Also, we will be able to service the interest of our Rs. 450 crore non-performing portfolio in Andhra Pradesh.”

The company’s capital base will go up to Rs. 320 crore from around Rs. 120 crore now. Five equity investors will increase their combined stake in the company to 58% from 43%, Mahajan said. Preference shareholders will not have any shareholding or voting rights except the eligibility to receive dividend.

The stake of Basics Ltd—the holding company of Basix group—in BSFL will come down to 20% from 35%, while the rest of the shares will remain with three other institutional investors, including Aavishkaar Venture Management Services Pvt. Ltd and Sidbi.

Mahajan doesn’t have any direct holding in BSFL but he has 61% stake in Basics Ltd. As part of the deal, banks are also likely to demand a personal guarantee from Mahajan and a slot on BSFL’s board.

Mounting bad loans have been threatening to wipe out BSFL’s net worth and reserves, Mint reported on 27 July. As of 30 June, BSFL’s net worth was Rs. 128 crore, down from Rs. 230 crore in September last year because of accumulated bad loans of Rs. 450 crore, the report said.

The bad loans would have led to the closure of the company by September, hurting its two million borrowers and the retrenchment of at least 5,000 people—most of them field workers. The company’s senior executives have already taken a salary cut.

Basix group has 10 companies, including the parent firm, organized under two broad categories—knowledge services and financial inclusion.

Industry executives and analysts said BSFL’s survival will encourage investors to turn to the sector.

“Knowing Basix, one can hardly imagine the company failing like this. That would have been a black mark on the industry, bankers and the entire investor community,” said Kishore Kumar Puli, managing director and chief executive officer of Trident Microfin Pvt. Ltd and chief of the microfinance institutions network (MFIN), an industry lobby.

“Companies which are able to survive for the next six months, will do really well due to clarity on regulation in the sector. Basix getting capital is a really good news. They are one of the best in market,” Santosh Singh, analyst at Espirito Santo Securities, said.

Banks will review BSFL’s performance after one quarter and decide on further funding, Mahajan said. “With the cash troubles receding, we have earned enough money to take care of the whole portfolio, including the Rs. 450 crore bad loans in Andhra.”

BSFL’s loan book has shrunk from Rs. 1,800 crore to Rs. 1,050 crore; Andhra Pradesh accounts for about Rs. 450 crore of the remaining loan.

Andhra Pradesh, India’s fifth largest state that accounts for more than one-quarter of the microlending industry, promulgated a law in October to control microlenders, after a number of farmers were said to have committed suicide driven by MFIs’ supposedly coercive means of getting back their money. BSFL’s repayment rate plunged to 10% in the southern state following the crisis.

The law, which restricted MFIs from collecting money from borrowers on a weekly basis, made it mandatory that government approval be obtained if a borrower takes more than one loan. While the repayment rate dropped to 5-10% following the state law, commercial banks, which typically provide 80% of the funds to the industry, stopped lending.

Early this year, BSFL opted out of a corporate debt restructuring (CDR) package offered by banks permitted by the Reserve Bank of India (RBI) to recast debt of around Rs. 5,000 crore without terming it as bad loans.

CDR is a process by which banks either extend repayment terms or write off some loans to help a troubled firm. MFIs that have taken recourse to CDR in Andhra Pradesh include Trident Microfin Pvt. Ltd, Share Microfin Ltd, Asmitha Microfin Ltd and Spandana Sphoorty Financial Ltd.

In July, the government unveiled a draft Bill on microfinance regulation that accorded sole regulatory power to the RBI.

Industry executives said the proposed Microfinance Institutions (Development and Regulation) Bill offers a sound framework, but the delay in implementing the law could worsen the situation. Reddy Subramaniam, principal secretary (rural development), Andhra Pradesh, said in an interview this month the state government will not step back from its legislation.

“It (the proposed federal law) doesn’t change the fact that MFIs come under the purview of moneylending activity and, hence, the state law,” Subramaniam said.

Source : Livemint

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