India: Three Microfinance Institutions - Spandana Sphoorty Financial, Share Micr...

Oct 2011
Mumbai, India, October, 25 2011 - Three microfinance firms which had proposed a merger at the time of their debt recast talks with banks in August have now called off the plans, saying it is not feasible.

Spandana Sphoorty Financial, Share Microfin and Asmitha Microfin had told banks that they will merge to create the Asia's largest microlender. The merger will cut costs, improve operations and help them return to financial health, the firms had said in their proposal.

Padmaja Reddy of Spandana Sphoorty Financial said the proposal was only taken to the lenders on the day of the corporate debt restructuring (CDR) meeting. A detailed proposal was never submitted, she added. "The merger proposal was not minuted in the CDR meeting and we see no sense in the merger now that the CDR package is cleared for each of the three MFIs," she said.

The debt recast plans of all the three firms was approved on September 30. CDR refers to the forum for lenders to meet, discuss and approve debt recast for companies in financial trouble.

The merger would have created the largest microlender surpassing SKS Microfinance.

The firms were forced to consider a merger following the complete collapse of lending and recovery in Andhra Pradesh, one of the country's largest markets for MFIs. A law passed by the Andhra Pradesh government imposed severe restrictions on the MFIs leading to near complete stoppage of repayment. The industry was on the brink of collapse before being rescued by a debt recast package at the instance of the RBI.

"The CDR cell had not contemplated the merger. The package was approved on a standalone bases. M&A is a long-drawn process including due diligence, sharing of the swaps and valuation process," a senior executive of the Small Industries Development Board of India said.

Under the proposal, the bad loan portfolio of Andhra Pradesh of all the three firms will be transferred to one NBFC, the good portfolio across the country will move to the second NBFC, while the non-microfinance portfolio, which mainly consists of asset-backed lending, will go to the third NBFC.

Udai Kumar, managing director of Share Microfin, said that the focus in not on merger right now. "We wanted to sort out issues regarding the debt restructuring first. The documentation for corporate debt restructuring is complete but there are some issues regarding tallying the books," he said.

The debt-recast programme included the conversion of a part of the debt into optionally convertible, redeemable preference shares. Loans were to be restructured with interest rate of 12% and a repayment period of seven-eight years, including a moratorium of one or two years.

Reddy said they planned to approach the Reserve Bank of India after the restructuring and seek complete relaxation from the capital adequacy norms for the first NBFC hosting the toxic microfinance portfolio.

After the merger, the plan was to have credit assistants for only one of the three MFIs and bring down the operating costs significantly and attract further loan and equity funds for the MFI with good portfolio, generating value for both the shareholders and lenders.

Further, Reddy said it was also realised later that it would be highly challenging to obtain approvals from the Reserve Banl of India and coordinate with over 40 banks, including some 25 public sector banks, involved in lending to the three MFIs. Also, integration of operations on the ground world would have been difficult.

Industry observers say that problems of the AP MFIs are not completely over with the latest CDR package. Shadab Rizvi of Darashaw & Company says that the AP MFIs may revive the idea of merger at a later stage when they cannot generate enough profits from the operations and need funds.


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