PE investment in MFIs at 5-year high

Private equity (PE) deals in the microfinance sector are on the rise, with the segment recording the highest equity inflow in the past five years.

So far this financial year, the sector has raised $276 million through PE deals. This excludes the $258-million equity commitment in Bandhan( $165 million from GIC and $93 million from IFC), which is set to become a bank soon.

In FY14, the segment had raised about $70 million through such deals. Some of the biggest PE commitments in the microfinance segment this financial year include those for equity investment of about $100 million in Ujjivan and $77 million in Janalakshmi Financial Services (the company, however, didn't confirm the amount). While CDC Group, the UK's development finance company PE firm(CX Partners) and Bajaj Group unit Newquest will invest about $50 million in Ujjivan, an equal amount will be deployed for buying shares from several existing investors.

Sources say about 10 microfinance institutions (MFIs) are expected to apply for small-bank licences, for which they have to increase cash reserves. According to Reserve Bank of India (RBI) norms, the paid-up equity capital of small banks should be at least Rs 100 crore.

 

"The opportunity to convert non-banking financial company MFIs into small finance banks has opened up the sector in a big way, leading to interest from investors. This is because as banks, MFIs will be allowed to collect savings, which makes their investments safe. Also, given the high interest in banks among PE firms, exits will be much easier," said Abhijit Ray, managing director, Unitus Capital.

 

 

"Equity deals are a part of our ongoing expansion. Also, RBI regulations have provided a lot of credibility to the sector. The funds will be used to expand in new geographies. We are also closely examining the prospects of applying for a small-bank licence. For that, we have a strong capital base of about Rs 1,000 crore," said V S Radhakrishnan, managing director and chief executive of Janalakshmi Financial Services.