 "MFIs dominate small finance bank licences")
The microfinance institutions (MFIs) which have secured in-principle licences to start a small finance banks (SFB) are now faced with the task of raising a substantial amount of domestic capital over the next 18 months to meet the regulatory requirement.
At present, almost all have foreign shareholding, mostly by private equity funds, of 70-90 per cent. According to the Reserve Bank of India (RBI)’s norms on SFBs, issued last November, the initial promoter stake should not be less than 40 per cent, locked for five years, and domestic shareholding of at least 51 per cent.
The guidelines said, “Existing non-banking finance companies (NBFCs), MFIs and local area banks that are owned and controlled by residents can also opt for conversion into small finance banks."
“Over the next 18 months, NBFC-MFIs which have received RBI’s in-principle approval for an SFB licence will need large amounts of domestic capital to comply with the regulatory requirement. This is going to be no easy task, given the high percentages of foreign shareholding in most significant MFIs, and more particularly, the eight in question. The other possibility is the relaxation in foreign investment norms, with 100 per cent equity being permitted in private sector banks," said Alok Prasad, former chief executive of the Microfinance Institutions Network.
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Notably, the RBI guidelines also said in accordance with foreign direct investment policy for private sector banks, the aggregate foreign investment in these from all sources could be up to 74 per cent. However, only 49 per cent of the foreign equity will be allowed through the automatic route. For raising the foreign equity from 49 to 74 per cent, the banks will need government approval.
Initially, the rule will not be relevant for SFBs. RBI has said for the first five years, the banks must have at least 40 per cent resident promoter equity. The promoter stake should be brought down to 30 per cent of the paid-up equity capital within 10 years and to 26 per cent within 12 years from the date of commencement of business.
The MFIs have already started scouting for investors. For example, Bengaluru-based Ujjivan might have to raise domestic capital in excess of Rs 500 crore to meet the requirement. While a part of the equity might come from existing investors, a substantial amount might have to be raised afresh, said Samit Ghosh, founder of Ujjivan. About 90 per cent of its stakeholders are foreign investors. The MFI is also in talks with a few insurance companies to raise capital.
“The mandatory domestic stake of 51 per cent is going to be a difficult and radical change. We might ask RBI to grant us some leeway, to bring down foreign equity in a phased manner," said Ghosh.
For Equitas Microfinance, foreign shareholding is one of the highest, at 93 per cent. “We will have to bring down the foreign stake to below 50 per cent. Some of our foreign investors will need to sell,” said P N Vasudevan, managing director.
At Ahmedabad-based Disha Microfinance, about 74% of equity is with India Value Fund, a Mauritius-based private equity entity. According to Rajeev Yadav, director, Disha Group, the MFI will need to raise around Rs 100 crore from domestic investors to meet the regulatory norms. At present, the capital base is Rs 150 crore.
Suryoday Micro Finance, which also got an SFB licence, has paid-up capital of Rs 40 crore. To meet the regulatory requirement on domestic shareholding, it would need to raise Rs 30-50 crore from domestic investors, said R Baskar Babu, board member.
