Basix gets 100 crore loan on personal guarantees of directors

In a first of its kind loan transaction in the troubled microfinance segment, public sector Central Bank of India has sanctioned a `100 crore loan to Bhartiya Samruddhi Finance Ltd (BSFL), the flagship company of the Basix group, against personal guarantees of its directors, including group chairman Vijay Mahajan.
According to Basix’s website, it has nine other directors on its board. The loan is yet to be disbursed.
Mahajan, 56, who is also the president of micro-lending industry body, microfinance institutions network (Mfin), and is currently undertaking a Shodh Yatra, a nationwide tour to “extended grassroots enquiry into the lives and livelihoods of poor people”, confirmed the development but said it may not necessary for Basix to avail of the loan as a bank consortium, led by Small Industries Development Bank of India (Sidbi), is looking into a `650 crore recast of the firm’s debt.
“The bank has sanctioned the loan for Basix. We are exploring the possibility of obtaining personal guarantees from MFIs against loans,” a Central Bank of India official said. He declined to be named as he is not authorized to talk to media.
BSFL is the fifth largest MFI in India, with around two million borrowers in Andhra Pradesh, Maharashtra and Orissa. It has a total personal loan outstanding of around `1,800 crore.
This is the first such loan that an Indian bank is extending to any microfinancier in the country after the industry plunged into an operational crisis in mid-October, when Andhra Pradesh, the fifth largest state in India accounting for at least one-fourth of country’s micro-lending industry, enacted a law to put an end to alleged coercive methods resorted to by some micro-lenders to recover loan dues from poor borrowers.
Officials of micro-lending industry said if banks insist for personal guarantees or any other sort of high collateral requirements, it would be extremely difficult for small MFIs to secure adequate bank finance to run their operations.
“No bank has entertained our requests for fresh loan ever since the crisis happened. What can I do if they seek guarantees worth `10-50 crore when my net worth will be far less than that?” asked the head of a Hyderabad-based MFI, who did not want to be named.
The budget for 2012 has proposed to create a `100 crore equity fund with Sidbi to help smaller MFIs survive when banks are not forthcoming to offer them loans. Indian banks, including Sidbi, have lent around `14,000 crore to microfinance institutions as on 31 March 2010, according to data from National Bank for Agriculture and Rural Development.
But since October, fresh lending has happened to few companies that have operations outside Andhra Pradesh.
The Andhra Pradesh law banned micro-lenders from giving a second loan to a borrower without prior government approval and made monthly collection mandatory for such firms instead of weekly or daily collections. This resulted in a sharp fall in the collection of loan instalments from borrowers, promoted banks to stay away from lending fresh loans to MFIs and forced micro-lenders not to give any new loans to their borrowers.
The Reserve Bank of India and (RBI) finance ministry stepped in to resolve the issues in the sector that is vital for financial inclusion of rural poor.
An RBI committee, chaired by Y.H. Malegam, had recently proposed a cap of 24% for MFIs and a margin cap of 10% for large ones, besides making it compulsory that not more than two MFIs can lend to the same individual.
RBI also asked banks to continue holding on operations to the sector by recycling loans to MFIs to the extent of recovery and resume lending, with a view to assist the ailing industry tide over the current crisis phase. But there are not many takers for the regulator’s call.
Perturbed by the regulatory uncertainty in the sector, some banks are now demanding higher credit enhancements in the form of cash collateral, personal guarantees and other securities such as land assets from MFIs for new loans and even to buy securitized portfolios.

So far so good

The Financial Stability Report (FSR) released by the Reserve Bank of India (RBI) is mostly reassuring. It confirms what the Committee on Financial Sector Assessment, headed by then-deputy governor Rakesh Mohan, had concluded almost exactly a year ago. The Indian banking sector is largely healthy. Banks are well-capitalised as far as regulatory capital adequacy ratios go and stress tests for credit and market risk show they can withstand ‘unexpected levels of stress. The problem, as the financial crisis showed, is that in the financial sector, it is hard to quantify the ‘unexpected’ , and when things begin to unravel, it doesn’t take long for even the big boys to go under; Lehman Bros being the classic example. So, while it is good to know that even if all the restructured loans were to turn non-performing, there would be no risk to the system and banks would continue to be well-capitalised , it would be naïve to ignore the reality that in the Indian context, a great deal of this robustness has to do with perceived confidence that comes from public ownership of close to 70% of the banking sector. Thus, even when Indian Bank’s capital was entirely eroded, there was no run on its deposits; in contrast to the bout of public anxiety over ICICI Bank, though its financial position was not endangered. Hence, as private sector players become larger, the RBI will need to be extra vigilant.
For the rest, the areas that need special attention include the potential asset-liability mismatch inherent in banks getting into infrastructure finance in a big way. As the report points out, a significant part of recent credit growth has been in infrastructure and commercial real estate, both requiring longer-term funding. However, bank deposits are essentially short term and, more important, are repayable on demand. Another area of concern is over-reliance on bulk deposits of the here-today-gone-tomorrow variety. Post the crisis, central counter-parties (exchanges) are being hailed as the answer to risks posed by trading in derivatives. However, as with securitisation, once seen as a win-win answer to risk mitigation, it would be unwise to see central counter-parties as fail-safe . They need to be regulated and monitored no less than banks and other financial sector players, as also rating agencies.