Banks on Wednesday asked the Reserve Bank of India (RBI) to ask, as an

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interim measure, all micro-finance institutions not to expand their portfolios until regulations are in place for the sector.

Bankers said they foresaw some stress in repayments by these institutions. They also asked RBI to reschedule and restructure their loans in the event of a stress.

A senior public sector banker told Financial Chr­onicle: “If there are willful defaults in one state, we expect it to spread to other states and our exposures should be protected.”

With collection the institutions deteriorating considerably in Andhra Pradesh, banks fear their exposure to the sector may come under stress. At their meeting with RBI, they expressed of the contagion spreading to other states.

The total exposure of banks to the sector is about Rs 10,000 crore; Sidbi is the largest lender with a book of Rs 3,500 crore. Private banks such as ICICI Bank and HDFC Bank have a substantial exposure to the sector. The State Bank of India has an exposure of Rs 1,100 crore to micro-finance institutions.

RBI, in a release, said it met select banks and Sidbi to get an assessment of the ground-level situation in micro-finance in Andhra Pradesh and other states and to discuss any interim measures. Though the institutions have so far met repayment obligations to banks, there are concerns for the future. Generally, the banks’ view was that while the Malegam committee may address structural issues of the micro-finance sector, some interim measures may be needed to address the gap between recoveries by the institutions and their payment commitments to banks.

Banks wanted an interim arrangement involving a rescheduling of their exposures with covenants such as the institutions agreeing to reduce their leverage and growth projections. Bankers requested RBI to consider some regulatory concessions to enable them to reschedule their exposure.