Five Indian Microlenders Reach Deal with Their Lenders

From Livemint.com:

Five leading Indian microfinance institutions (MFIs), struggling because of a fund squeeze that has gripped the industry, have been accorded a substantial measure of relief by banks approving the restructuring of around Rs. 5,000 crore [$1.1 billion] of debt....The CDR package stipulates a one-year moratorium on repayments and seven years to repay loans for the five MFIs.The banks also plan to convert a part of the debt into convertible preferential shares. These will be turned into equity if any of the five MFIs default. MFIs are still negotiating with banks over converting a portion of the debt directly into equity.Banks will also have two--three nominees on the boards of the microlenders and a larger say in the appointment of chief financial officers and other key officials. This will allow them to ensure that further slippages do not take place.

Notably absent from this deal is SKS. It had a large equity cushion even before its public stock offering last summer, so it appears able to absorb any losses in Andhra Pradesh and move on.The story is far from over for the other MFIs. To the best of my understanding, this deal hardly reduces the face value of the banks' claims on them. The MFIs have more time to repay, but have to pay interest over more years as a result. So this deal essentially assumes that MFIs will eventually get most of their ~$1.1 billion back in Andhra Pradesh. That seems unlikely to me. The state government seems dead set against revoking the law it passed last October. Their are noises from the central government about a law that would preempt the AP Ordinance, but even if that is passed, I wonder if the AP government would continue to signal borrowers not to repay. And even under the best of circumstances, the more time that goes by, the harder it will be to coax AP borrowers to come back into the fold.The deal acknowledges the possibility of a messy outcome by entitling the banks to turn some of their IOUs into shares of the MFIs---"preferential shares," meaning that they trump the claims to profits of previous equity investors. I'm sure the banks would rather just get their money back. But if they do exercise this option, they will want the shares to be worth something, which means that the MFIs must quickly expand beyond Andhra Pradesh. This deal apparently gives them no new capital to do so.