Move helps lenders meet agri-lending targets, boosts micro-finance institutions' CAR.
Private banks are increasingly buying the farm loan portfolio of micro-finance institutions (MFIs) in an attempt to meet the agriculture sector lending targets.
Such transactions also help MFIs meet the capital adequacy ratio (CAR) of 12 per cent as their total asset base goes down after the sale. In addition, it assists banks meet the priority sector lending targets because they are required to extend 13.5 per cent of their advances as direct agricultural loans.
Grameen Capital India, which recently facilitated a Rs 100-crore deal between IndusInd Bank and SKS Microfinance is now working on three to four more such transactions. During the last four months, it has facilitated agri-portfolio transactions worth Rs 170 crore.
In a farm portfolio deal, a pool of micro-finance assets is sold to a bank at a discounted rate. These assets then become a part of the bank’s books.
While MFIs get upfront payment for the loans sold, they later share the interest charged from customers. So if an MFI sells a Rs 100-crore portfolio to a bank, it receives a consideration for the sale. Later, it keeps a share of the interest income while passing on the rest to the bank.
The interest rate levied by MFIs is at least 18-20 per cent a year and varies according to the loan category and the tenure of the loan.
Banks, especially public sector lenders, usually charge lower rates. For farm loans up to Rs 3 lakh, the effective rate is 7 per cent as mandated by the government, which provides a 2 per cent interest subvention. For some categories of loans, State Bank of India (SBI) charges around 12.75 per cent.
MFIs’ liability is only to the extent of the credit enhancement level, which is decided in advance. Grameen Capital India Vice-President Shashi Shrivastava said most of the tier-I MFIs that are based around Hyderabad have sold their loans to banks.
Bandhan, a Kolkata-based MFI, is in talks with some of the leading private banks to sell its agriculture loan portfolio, while Biswa, an Orissa-based institution, which recently sold Rs 23.51 crore worth of such assets to IndusInd Bank, is eyeing more deals in coming months.
“We are in talks with banks like ICICI Bank and IndusInd Bank for sale of agri-portfolio,” said Bandhan Managing Director Chandra Shekhar Ghosh.
Rajiv Sabharwal, head, retail assets and agri business, ICICI Bank, said, “We have done such deals in the past, not necessarily specific to agriculture. It is an ongoing process as an MFI will grow with a bank’s support.”
S N Pai, executive vice-president, IndusInd Bank, added that the bank is open to buying more farm loans as it will help the private player achieve the lending targets specified by the Reserve Bank of India (RBI). “These kinds of deals are different from banks lending to MFIs for onward lending to micro-finance customers. That is considered as indirect (lending). The good quality of a micro-finance portfolio, in terms of repayment rates and shorter-tenure loans (of around one year), is one of the features that banks find attractive. While only larger MFIs have typically done such transactions, Grameen Capital India structured such a sale for Biswa (a medium-size or tier-II MFI based in Orissa),” said Shrivastava.