Even as investors await regulatory clarity, allocation to Indian MFIs won’t dip.
Though Indian private equity players are upset over the Andhra Pradesh government’s stand against the state’s microfinance sector, the global investors that pump money into the PE firms remain bullish on the sector. Microfinance institutions (MFIs) already face a shortage of funds as banks refuse to lend them money.
The whole microfinance sector remains in a state of dysphoria following the approval of the Special Ordinance by the Andhra Pradesh government to rein in microfinance institutions (MFIs) in AP. Last week, the AP government suggested to the Reserve Bank of India-appointed YH Malegam committee not to allow MFIs to tap the capital market (floating IPOs) or private equity (PE) firms for funds. AP has the largest number of MFIs in the country.
MFIs have posted over 500 per cent growth this year as far as PE investments are concerned. In 2009, only five deals worth $20 million took place, while 2010 witnessed about 18 deals worth $132 million in the microfinance space, according to VCCedge data.
Hiti Singh, Investment Manager, Alternatives, CDC Group Plc, the largest global lender to Indian MFIs, said, “CDC continues to support the microfinance sector as one that has an important development impact by providing access to financial services to the previously unbanked population. We will closely monitor the situation in India and take into account new developments as we evaluate new commitments to Indian microfinance. In principle, our allocation to Indian microfinance will not change; however, we are keenly awaiting the regulatory guidelines that will shed more light on the future operations of MFIs.”
CDC Group, the UK government-backed fund of funds with net assets of $4 billion, invested over $40 million in microfinance in India via its microfinance private equity funds. This represents over 50 per cent of CDC’s total commitments to microfinance globally. In India, CDC has invested in Financial Inclusion Fund and Catalyst Microfinance Investors.
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PGGM, the €75-billion Dutch pension fund asset manager, also made a significant investment in the Indian microfinance sector. PGGM invested $60 million in a microfinance private equity fund managed by Grassroots Capital. When contacted, a PGGM spokesperson said, “We cannot give out information about current investments and future plans with them.”
According to industry experts, the AP issue has brought to light the necessity for a framework for regulation for Indian microfinance. “Client protection principles, transparency and collection practices have all received greater attention as a result of the recent developments in AP,” an expert said.
Sanjay Doshi, director (financial services), KPMG, said, “In the short run, there are a few challenges such as regulatory changes, potential reduction in interest rates and availability of finance. However, over a longer term, in addition to the improvement in operating efficiency, the business model will evolve from micro credit to micro finance which will include the availability of other financial products to that segment of the society that does not have access to normal banking channels. This will make the objective of financial inclusion more meaningful and the sector more attractive to investors.”
“We expect that the RBI sub-committee focused on this issue will produce clearer guidelines on the best practices for the microfinance sector. We support responsible microfinance and we welcome new regulation which helps build a sustainable microfinance sector in India,” Hiti added.
However, the industry and PE investors are concerned over the ‘un-democratic’ actions of the AP government. Vishal Mehta, MD & Co-Founder, Lok Advisory Services, one of the leading PE investors in microfinance, said, “The recent actions of the AP government are just one-sided and they never heeded the concerns of the industry. The government was never ready for a discussion with the MFIs in Andhra Pradesh.” Such kind of government intervention will hurt the industry and PE investments will come down drastically, he added.
Lok Advisory has invested in four MFIs across the country such as Suryoday Microfinance, Satin Credicare Network, etc. In the largest ever investment in MFI, Lok Advisors invested about $27 million with three other investors in Bhartiya Samruddhi Finance in April 2010.
Nitin Agrawal, CEO, Spandana, said, “This is one of the most significant events that can undo all the efforts made by the industry in the last 10 to 15 years. Over the years, MFIs have developed a delivery model that is able to meet some of the basic financial services needs of the low-income community.” Spandana Sphoorty Financial Ltd is a leading MFI in which a clutch of PE firms such as Blue Ridge, IFC, Lok Advisory, JM Financial and Ascent Capital invested about $25 million in 2007.
Nitin said, “As a nation, whatever progress we make is not worthwhile unless the lowest income strata are included in the growth. This has been regularly articulated by all the governments and RBI. MFIs emerged as an efficient engine of financial inclusion where loans are not written off. People pay since they find value in paying back, and we make it convenient for them by way of doorstep delivery.”