MICROCAPITAL BRIEF: Reserve Bank of India (RBI) Mandates Personal Guarantees from Promoters of Microfinance Institutions (MFI) Looking to Restructure Debt

The Corporate Debt Restructuring (CDR) cell of the Reserve Bank of India (RBI), after a unanimous decision, declared that promoters of microlenders will be required to provide personal guarantees in order for their institutions to refinance their debt in the wake of the microfinance turmoil in the Indian state of Andhra Pradesh that began in 2010. The announcement has raised concerns that endeavors to restructure microfinance institutions’ (MFIs) debts will be in vain, given the promoters’ opposition to CDR’s decision.

The Reserve Bank of India (RBI) is unlikely to postpone the June 6, 2011, deadline for the finalization of the loan-restructuring program according to an unnamed banking executive partaking in the debt restructuring program, who was quoted as saying: “There would be no further discussions on this issue.” “Personal guarantee is [a] must,” affirmed the chairman of CDR.

CDR is considering requests to restructure loans worth INR 64.7 billion, equivalent to approximately USD 1.4 billion, involving the following Indian microfinance companies: Asmitha Microfin, Future Financial Services, Share Microfin, Spandana Sphoorty Financial and Trident Microfin. Currently, the total debt of these companies is estimated to be INR 74.1 billion (USD 1.7 billion). Analysts predict that if the restructuring program fails, the non-performing loan ratios of banks that lend to MFIs will substantially increase.

By Hajar Elaalej, Research Associate

About Reserve Bank of India: Established in 1935, the Reserve Bank of India undertakes consolidated supervision of the financial sector comprising commercial banks, financial institutions and non-banking finance companies (NFBCs). The current focus of RBI is to supervise financial institutions, consolidate accounting standards, resolve legal issues in cases of banking fraud, monitor non-performing assets and supervise the rating model for the banking sector. In 1979, the National Bank for Agriculture and Rural Development (NABARD) was formed at the behest of RBI to provide regulatory oversight to regional rural banks (RRBs) and to promote the development of agricultural lenders: tasks that had been the responsibility of RBI. While all microfinance institutions (MFIs) and non-banking financial companies still operate under RBI regulations, the responsibility for inspecting nonprofit MFIs, agricultural lenders, RRBs, state cooperative banks, district central cooperative banks and state cooperative agricultural and rural development banks was transferred to NABARD. RBI maintains these responsibilities for for-profit MFIs. Although RBI was originally the parent organization of NABARD and until October 2010 held a 72.5 percent stake in the outfit, RBI owns a one-percent stake in NABARD as of 2011.

Source and Additional Resources:

Business-standard.com, May 20, 2011, “Personal Guarantee Mandatory for MFI Debt Restructuring”, http://www.business-standard.com/india/news/personal-guarantee-mandatory-for-mfi-debt-restructuring-/436212/

MicroCapital Brief, June 3, 2011, “Costs Rise for Indian Microfinance Institutions (MFI’s) Looking to Securitize Loan Portfolio From 10 % to Over 12 %”, https://www.microcapital.org/microcapital-brief-costs-rise-for-indian-mic…

MicroCapital Brief, April 19, 2011, “Indian Banks Seek Personal Guarantees from Microfinance Institution (MFI) Executives as Condition of Debt Restructuring”, https://www.microcapital.org/microcapital-brief-indian-banks-seek-persona…

MicroCapital Universe Profile: Reserve Bank of India (RBI), https://www.microcapital.org/microfinanceuniverse/tikiindex.php?page=Reserve+Bank+of+India+%28RBI%29

Browse the MicroCapital Universe and add your entry to the wiki at: https://www.microcapital.org/microfinanceuniverse/

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