Microfinance institutions (MFIs) in the country need Rs 2,500 crore equity to meet statutory requirements and expand footprint.
RM Nair, general manager, Small Industries Development Bank of India (Sidbi), said the MFIs needed Rs 2,500 crore to meet the 12 per cent capital adequacy ratio (CAR) norm by March 31, 2010. This minimim CAR for them is expected be increased to 15 per cent by 2011.
Apart from scaling up, MFIs could invest in technology to bring down transaction costs and lower lending rates, he said. This might also spur them to offer new products, he added.
Sidbi’s equity exposure to MFIs on March 31, 2009, was Rs 50 crore and it has lined up another Rs 500 crore for lending. “We will not take more than 20 per cent equity in any institution. We do not want to take control but encourage MFIs to reach more rural areas, for which they need money,” he said.
According to Venture Intelligence, a Chennai-based research company which specialises in PE and merger and acquisition (M&A) deals, total PE investments in MFIs between January and October rose to $143 million (around Rs 715 crore) from around $61 million (around Rs 305 crore) a year ago. The number of deals rose from eight to 11. Reaching untapped geographies would be a key growth driver for MFI lending, he said.
Nair said while rural areas needed Rs 2.50 lakh crore credit per year, only Rs 30,000 crore was available till March 31 this year. Of this, MFIs’ exposure was Rs 12,000 crore.
PE companies have shown interest in investing in Indian MFIs, particularly those registered as non-banking finance companies.
PE opens a new source of funds for MFIs, who otherwise rely on commercial banks. “Bank funding has resulted in high leverage (debt-to-equity ratios) for some MFIs. Availability of PE money could help MFIs raise their equity, resulting in more sound leverage levels.”
Microfinance, apart from education and to some extent logistics, is among the few sectors in which PE investments grew even during the difficult period between October 2008 and March 2009, said Arun Natarajan, CEO, Venture Intelligence. A key reason is that given its rural focus, microfinance is seen as largely immune to developments in developed countries. Plus, the sector had been witnessing tremendous growth and had consistently shown high loan recovery rates, said industry sources.
Natarajan said there were various types of investors active in microfinance. Among them are foundations such as the Michael Dell Foundation and the Omidyar Network. Then, there are individual investors such as Vinod Khosla. These are also dedicated microfinance funds such as Lok Capital, Bellwether and Aavishkaar Goodwell, besides PE/ venture capital (VC) funds such as Sequoia, Temasek, JM Financial and ICICI Venture that actively fund the sector.
The sector has seen PE investments worth $380 million in 30 deals since mid-2006. With SKS Microfinance’s IPO due next year, the pace of investments was expected to rise significantly, he added.
