By Nidhi Bothra,Vinod Kothari Consultants P Ltd

Microfinance Focus, April 16, 2011: Microfinance industry in India seems to be in a real state of confusion. First, the industry facing setback of the RBI guidelines on securitization of short term loans making it impossible for microfinance loans to be securitized and leaving MFIs to depend on bank borrowings as a funding source. Then the microfinance institutions facing the ripple effects of the Andhra Pradesh government’s ordinance, borrowers defaulting; rising defaults, banks pulling credit and shying away from any further lending or securitizing loan pools leaving the cash strapped microfinance institutions with no other option but recasting their debt by banks and financial institutions.

Just then, in such a state of frozen credit, banks were reported to provide additional line of credit of Rs 1,500 crore to MFIs to achieve their targets in the financial year 2010-11. Despite micro lenders facing several defaults, this came as a sign of relief to the microfinance institutions.

It was a double whammy when the finance ministry said it was mulling over reviewing the portfolio of public sector banks to ensure they were lending directly to the priority sector and not buying loans from regional rural banks (RRBs) or microfinance institutions (MFIs) to meet their priority sector lending requirements. The ministry felt that the purpose of emphasizing on priority sector lending for banks to channelize lending to agriculture and weaker sections was getting lost.

Another difficulty glaring at the face of microfinance institutions and bankers is, while the banks are continuing to gain exposure in MFIs by way of securitization, as it is considered as direct lending to the priority sector, the MFIs are topping the banks list of non-performing assets. In such a scenario the Indian Banks Association had requested RBI to relax its restructuring guidelines, for the MFI sector as the benefit of Prudential Guidelines on Restructuring of Advances by Banks are available to the dues to the banks that are fully secured, while the bank loans to MFIs are mostly unsecured.

Taking stock of the situation, RBI vide circular RBI/2010-11/376 DBOD.BP.BC.No. 74 /21.04.132/2010-11 dated 19th January, 2011 provided the relaxation that special regulatory asset classification benefit would be extended to restructured MFI accounts which are standard at the time of restructuring, even if they are not fully securedⁱ. The relaxation was granted as a temporary measure and was to be made applicable to Standard MFI accounts restructured by banks up to March 31, 2011. RBI had also advised that the banks should adopt the consortium approach for restructuring where all the banks financing and MFI would decide on the course of action to be taken for that unit. RBI further looked at the Malegam Committee to resolve issues with regard to priority sector lending and restructuring of debts, the focus of the report was only on making the loans affordable and looking for a rationale for rate of interest charged.

It is estimated that almost a third of the loans that banks have given to microfinance institutions would be admitted for restructuring. Each MFI would have a core team of 10 lenders who would discuss restructuring of loans of that MFI.

There are some banks wanting to restructure the securitized loans along with other loans and have requested Reserve Bank of India to treat these loans on par with microfinance loans as without restructuring these loans the loans would become non-performing. Also if securitized loans become non-performing the provisioning requirements would go up impacting the bank’s balance sheets. The Malegam Committee reportⁱⁱ stated that the assigned and securitised portfolios held by banks as at 31st March 2011 are believed to aggregate to around Rs. 4200 crores.

While there is opposition from several banks, but if Reserve Bank was to accede to the request, the very essence of securitization may be lost. This would tantamount to securitized loans pools to be nothing but loans extended to the MFIs in the garb of securitization and in such a case the so called securitized loans should not go off the books of the MFI. Once the asset sale takes place, the risk is transferred.

Securitised loans are not a matter of convenience and cannot be treated as such. The industry in the recent times has faced tumultuous times and ironing of these is the need of the hour.
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i. circular DBOD.No.BP.BC.No.37/21.04.132/2008-09 dated August 27, 2008

ii. http://rbidocs.rbi.org.in/rdocs/PublicationReport/Pdfs/YHMR190111.pdf

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Ms. Nidhi Bothra, ACS is Vice President at Vinod Kothari Consultants and has written, lectured and published on advanced financial topics such as securitisation, affordable housing, leasing, Islamic finance, microfinance, carbon trading etc.  Nidhi can be contacted at this email id : Click