MFIs See Sharp Erosion in Loans, Net Worth

Monday, June 27, 2011

Mumbai: Afew large microfinance institutions (MFIs) are trying to cope with a funding squeeze that followed a crisis after Andhra Pradesh introduced a stringent law governing microlenders nearly eight months ago, which saw assets of some MFIs drop by at least one-fourth.

Bhartiya Samruddhi Finance Ltd (BSFL), for instance, is focusing on fee income to tide over the crisis, and SKS Microfinance Ltd plans to diversify its business and start offering gold loans in a big way.

Most MFIs are also seeing their net worth being eroded due to mounting bad loans in the southern state, and the scenario may worsen on account of write-offs, industry officials said.

“You could see the erosion (in loans and net worth) happening due to write-offs,” an MFI official said on condition that neither he nor his firm be named.

MFIs extend small loans to poor borrowers at a rate of 26% or above, typically for a year.

More than one-fourth of the industry is concentrated in Andhra Pradesh, which promulgated a law in October restricting the operations of microlenders. This led to a drastic rise in their bad loans as borrowers stopped repaying debt.

The loan book of BSFL, an MFI promoted by Vijay Mahajan-led Basix group, has shrunk to Rs. 1,117 crore from Rs. 1,808 crore in September, when the crisis hit the industry.

Since then, its net worth has dropped to Rs. 201 crore in May, from Rs. 229.4 crore in September, as the company had to provide for its mounting bad loans, drawing down from its reserves.

During the period, BSFL’s share of loans in Andhra Pradesh to its total loan book also rose sharply-around 35% as against 31% in September-due to the shrinkage in its loans outside the state, which came down to Rs. 727 crore from Rs. 1,244.8 crore.

BSFL is one of the two large MFIs in the state that opted out of a corporate debt restructuring (CDR) offered by Indian banks after the Reserve Bank of India permitted banks to recast loans of around Rs. 5,000 crore without terming them as bad loans. The other is SKS Microfinance, India’s only listed MFI.

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