IFC has stakes in more than half the small finance banks

Borrowing at a lower rate would be a challenge since the erstwhile MFIs cannot get priority sector lending from banks

The World Bank’s investment arm International Finance Corporation (IFC) has invested $145 million (around Rs 950 crore) in six of the 10 companies that have been granted small finance bank licences with a collective client base of nine million. IFC said small finance banks were a major step to promoting financial inclusion and it saw the initiative as part of concerted policy efforts to meet the needs of small businesses, the unorganised sector, low income households, farmers, and the migrant workforce.

IFCs investments in Equitas, Ujjivan, Suryoday, Utkarsh, AU Financiers and Janalakshmi were made through debt and equity mainly during 2010-2012. IFC’s shareholding is in the range of 10-15 per cent because the institution generally does not take more than 20 per cent stake in the companies it invests in.

Swapnil K Neeraj, principal investment officer, Financial Institutions Group, IFC, said the institution had equity investments in five of the six small finance bank applicants that had been accorded approval in principle by the Reserve Bank of India. In the sixth, IFC has only a debt exposure. Five of these six companies are MFIs and one is a non-banking finance company.

Asked whether any other investor held such a large portfolio in the companies selected for small finance banks, Neeraj said mainstream investors were slowly entering the sector as its investment worthiness was being recognised by the broader investor community.

Small finance bank licences are skewed towards microfinance institutions. Most of those that have been granted licences have a large outreach. The licences allow microfinance institutions to provide a range of products across credit, savings, remittances and payments. On conversion into banks, these institutions can mobilise savings from customers and will be able to reduce their reliance on costly wholesale funding.

The new banks are, however, likely to face challenges in deposit mobilisation initially as they compete with existing banks. Besides, bank lending to microfinance institutions, driven partly by banks’ priority sector lending requirements, might dry up for the new banks because the rules may not permit it.  Over the next 18 months, small finance banks will need large amounts of capital to comply with regulatory requirements.

Building institutional capacity, including that of staff to handle deposit and credit products, is another challenge.

“We are ready to support them. The process is not clear still. We have advisory services to develop products, risk management and client service,” Neeraj said.

IFC’S JOB CARD

In microfinance space (globally)

• Transformation of more than 25 MFIs into full-fledged commercial banks
   
• Co-created five holding company networks with 61 subsidiaries in 44 countries
   
• Helped build microfinance fund industry, by investing $350 million in 25 MIVs across the globe

In microfinance space (India)

• Of the 10 companies having SFB licences, six are IFC-invested companies, having a total customer base of nine million
   
• IFC-invested companies include Equitas, Ujjivan, Suryoday, Utkarsh, AU Financiers and Janalakshmi
   
• IFC’s shareholding at 10-15 per cent
   
• A total of $145 million through debt and equity in these institutions
   
• Through its direct investment in MFIs, IFC reaches over 15 million clients, which is around 50 per cent of the present microfinance institutions’ outreach in India