(This article originally appeared in Merger Market and was written by Bruhadeeswaran R)
Fund raising activity in Indian microfinance sector is expected to gain momentum and scale on the back of an improved regulatory environment and the government of India’s financial inclusion agenda.
Industry sources expect investors to cut larger cheques to microfinance institutions (MFI) this year as the sector enters a growth phase, having emerged from a 2010 regulatory crisis. The funding requirements have also gone up as MFIs look to expand their services as well as foray into the newly created small financing banking business, the sources say.
Regulatory certainty in the sector after the Reserve Bank India’s decision to bring MFIs under its purview by introducing a new category called Non-Banking Finance Company – Microfinance Institutions (NBFC-MFIs) in 2013 has given a fillip to growth in the sector that was previously being regulated by respective state governments.
The transition has seen companies in the sector that typically raised USD 5-10m in equity funding receive investments of more than USD 50m from private equity investors last year.
The Bangalore-based Janalakshmi Financial Services, which raised USD 14.6m in 2012, raised USD 57m in 2013 and reportedly closed a USD 100m round last month. Ujjivan Financial Service, the Bangalore-based MFI that raised USD 9m in 2012, is in talk to raise USD 55m from existing and new investors. Equitas Holdings that raised USD 16m and USD 10m in 2013, and raised USD 52.5m in 2014.
Some of the other top MFIs by total loan portfolio are SKS, Spandana, Satin, Muthoot, GFSPL and ESAF. Some of them are also planning to go for a fundraise, according to media reports.
The potential demand in the sector indicates huge opportunities, hence capital infusion is expected to go up in this sector, Ujjivan Chief Financial Officer Sudha Suresh said. She added that mid and small sized MFI’s are expected to join the bandwagon this year.
According to a report by Microfinance Network Institutions, the aggregate loan portfolio of the 48 member institutions as of September 2014 stood at INR 288bn indicating a 47% growth year-on-year. Rating agency Crisil expects MFIs to report buoyant growth over the medium term and their loan assets are likely to reach INR 350bn by March 2015.
Abhijit Ray, Managing Director, Unitus Capital said that while the small finance bank guidelines have brought in a lot of positivity in the market, the regulatory clarity on NBFC-MFIs led to opening up of debt lending window by public sector banks and other funding options such as non-convertible debentures and external commercial borrowing in the last couple of years has given a strong message to the investors.
Bankers say that the high growth rate would require them to tap the market regularly.
Ritesh Chandra, Executive Director Avendus, said that investor interest in this segment is active as the credit off take has been very robust backed by negligible defaults. The size of the total microfinance market in India is estimated at about INR 4 trillion, with the urban and rural mix being 30/70, he added. The growth of the larger MFIs has been in the vicinity of 25-30% with a loan size for individuals typically varying between INR 12,000-15,000 for a one year loan.
Bankers also point out the changing profile of investors from so-called impact investors and microfinance focused funds such as Lok Capital, FMO, Aavishkar Goodwell, MSDF, NMI, Incofin and Creation to big-name domestic and international growth funds such as Morgan Stanley Private Equity Asia, Tata Capital Growth Fund, QRG Enterprises as well as investment arms of large Indian corporate houses such Bajaj Group and Havells India. Other media reports also noted that investor such as UK-based CDC, Indian private equity firm CX Partners are evaluating MFI investments.
The trend indicates that the initial growth phase of the sector considered to be unsecured and fraught with risk has matured and has caught the interest of growth-stage investor.
Small bank, big plans
Besides the robust growth in lending, sources feel that investment opportunity in the sector can multiply manifold as some of the large MFIs are preparing to convert into small finance banks.
To push the government’s financial inclusion agenda, the RBI is inviting NBFCs to convert themselves in a small finance bank who would give supply credit and savings products in the unbanked areas.
Kartikeya Singh of Phoenix Legal said that many MFIs are keen to convert themselves into a bank because they would be able to accept deposits and cater to a wider suite of customer base. MFIs typically can lend up to INR 50,000 and as the requirement of the clients increase, the cap becomes a growth deterrent forcing them to seek small finance banking licenses.
TV Raghunath, Managing Director & CEO, Kotak Investment Banking said that some might need to raise capital for the banking foray, he added. However, the guidelines say that the minimum paid-up equity capital for small finance banks shall be INR 1 bn.
In April 2014, Kolkata-based Bandhan Financial Services was given an in-principle nod by the Reserve Bank of India (RBI) to set up a bank. The other MFI that was competing to secure a banking licence was Janalakshmi. MFIs such as ESAF, Suryoday Micro Finance, Arohan, Sonata Finance and Saija Finance have evinced interest to apply for Small Finance Banking license.
Bankers suggest that MFIs could also start evaluating initial public offerings to raise equity capital. Unitus Capital’s Ray said that at least one of the top five MFIs, which includes Janalakshmi, Ujjivan and Equitas may go for a listing in the next couple of years. SKS Microfinance is the only other MFI that has done a listing so far.