At a time when the microfinance sector is reeling under a liquidity crisis, top microfinance institutions (MFIs) such as SKS and Bandhan are looking at alternative options like non-convertible debentures (NCDs) and commercial paper (CP) for raising funds.
SKS, the country’s largest MFI, plans to raise as much as Rs 500 crore through a combination of NCD and CP this financial year. “We have a credit rating limit of Rs 500 crore, which we plan to use during the rest of this financial year. We may look at raising about Rs 250 crore through NCD,” said chief financial officer Dilli Raj.
Another MFI, Bandhan, was planning to raise Rs 100 crore through NCD by October, said Bandhan chairman and managing director Chandra Shekhar Ghosh. The sector has been bleeding since October last year, when the Andhra Pradesh government had issued an ordinance that severely curbed MFIs’ operations in the state. About one-fourth of the MFI industry is concentrated in Andhra.Subsequently, the Reserve Bank of India constituted a committee on the issue under the chairmanship of noted chartered accountant Y H Malegam, which gave a report a few months earlier.
However, implementation of the report, which recommended a cap of 24 per cent on interest rates charged by MFIs, has failed to instil confidence in bankers to lend.
“All MFIs are currently facing severe liquidity crunch, and as a consequence, are looking at avenues like NCD to raise funds. Banks have been going slow in terms of fresh lending. However, to get a good rating to raise funds through NCD is also a challenge,” said Microfinance Institutions Network CEO Alok Prasad.
“At this point, getting a good credit rating has been a challenge. As a result, most of the NCDs are accounted for by MFIs based out of Andhra,” said the head of a prominent MFI based in Andhra Pradesh.
Bangalore-based Ujjivan Financial Services, too, has raised Rs 23 crore by way of private placement of NCD. Standard Chartered Bank was the sole book runner and lead arranger of the issue.
“Many smaller MFIs are now going for credit rating. We are also looking at raising funds through NCD over the next few months,” said Shubhankar Sengupta, managing director of Kolkata-based Arohan Microfinance.
Some other smaller MFIs that have raised through NCD in recent months include Chennai-Equitas Micro Finance India and Rajasthan-based Sahayata Microfinance.
While NCD and CP had been a popular fund instrument for MFIs prior to the crisis in Andhra Pradesh, after the new regulations, not many of them had been looking at NCDs to raise funds. Also, most of the NCDs are being raised by MFIs, with substantial operations outside Andhra Pradesh.
However, the cost of raising funds through NCDs had been at least 200-300 basis points higher than regular bank funding, with most transactions being bilateral in nature, with no public participation.
“At this point, getting a good credit rating has been a challenge. As a result, most of the NCDs are accounted for by MFIs based out of Andhra Pradesh. It is being done only with some understanding between the parties concerned,” said the head of a prominent MFI based in Andhra Pradesh.
