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PSU banks plan MFI loan conversion into equity

Public sector lenders have come out with a proposal to salvage troubled microfinance industries

Public sector lenders have come out with a proposal to salvage troubled microfinance industries (MFIs) —conversion of loans into equity in the company in case of any default. State-run Corporation Bank is the first bank which has come with the idea to safeguard its risk through this route.

Other lenders like State Bank of India,Bank of India,Indian Overseas Bank,Punjab National Bank and SIDBI — which have maximum exposure in the sector — are also said to be toying with this idea,said a banking source. “The microfinance industry is a very lucrative sector and we consider it very good from the investor perspective. From now on,we will be putting a clause in our loan contracts through which we will get an equity stake in the MFI in case of a default,” Corporation Bank chairman and managing director Ramnath Pradeep said.

Corporation Bank’s current exposure to the MFI sector is around Rs 600 crore,which is not even one per cent of its overall exposure of Rs 69,000 crore. “No lending has yet been done under the equity-in-case-of-default clause. This applies to the newer ones which we will be giving,” Pradeep said. “The equity-for-loan clause mentions that the stake will have to be given to the bank at par or at the face value of every share,which can result in a windfall to a bank,” Pradeep said,adding “MFI shares are still strong. The share’s market value can be Rs 700 but I will get it for Rs 10 as the face value.”

Bank lending to MFIs has dried up following concerns over high interest rates of around 30 per cent or above being charged by these micro-lenders. “Though the micro finance institutions get more than 80 per cent loans from the banks,most of the MFIs will starve for funds from the banks if they are categorised as a ‘case of default’,” said a top banker. Following the troubles in Andhra,many banks have gone on record to the state that they will not be lending to MFIs till the current crisis gets resolved,or they bring down or cap their interest rates at 24 per cent.

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First published on: 04-12-2010 at 02:27 IST
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