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Global investors line up for microfinance pie

Grameen Bank’s success story and the growth of microfinance institutions have captured the imagination of overseas investors of various kinds.

After SKS Microfinance and Share Microfin, Spandana and Basix are the next set of microfinance institutions to be approached by foreign investors willing to infuse capital. Quebec-based co-operative bank Desjardins and Oiko Credit of the Netherlands figure among the list of investors.

What is it that brings these investors to local MFIs? It’s felt that there is an investment gap in the Indian microfinance space, which could be due to lack of funds coming from local sources. Since foreign investors find the Indian rural economy far too opaque and complex, acquiring equity stakes in existing MFIs possibly makes sense. It’s easier than setting up a new shop.

Internationally, there are corporates, institutions and high networth individuals who are inclined to put money in global funds aimed at promoting sustainable development across the globe; and, these funds often invest in MFIs of emerging economies like India.

Many of these individuals could be those with surplus funds, belonging to the ranks of Silicon Valley-based entrepreneur Vinod Khosla. Understandably, these investments are in no way a part of their main income stream. It could well be a blend of social responsibility and intelligent investment.

The Indian microfinance industry is dominated by 4-5 large MFIs, which are fast-growing and need bigger investments. Equity happens to be the preferred route to get funds for most non-banking finance companies operating as MFIs; it increases their leveraging capacity, allowing them to raise more fund through the debt route. The other option is external commercial borrowings (or foreign loans), subject to regulatory restrictions. Most MFIs are seen to be reporting repayment rates of 98-99%, which overseas lenders are quite comfortable with.

How does an overseas investor evaluate an Indian MFI? It examines the MFI network in rural pockets, the extent to which the social obligations are fulfilled, whether the MFI has the discipline to sustain its earnings, besides the present shareholding and the pricing of recent share transfers. It also looks at the calibre of promoters, the management and the governance structures in place. Such investors do expect a very high return on equity — as high as even 30% in some cases.

Oiko Credit has an NBFC called Manaviya Investments and Holdings in India, through which it lends to local MFIs. The company has recently recruited an equity manager in India. The parent company is now planning to buy a stake in Chennai-based MFI, SMILE, and a Dehradun-based low-cost housing finance company. It’s also in preliminary talks with a Hyderabad-based MFI for a similar purpose.

A senior official of Spandana said, “We are looking at raising funds of around Rs 40-50 crore and are in talks with a few local private equity funds, microfinance funds and even certain mainstream investors.” The MFI would not dilute the current shareholding, but would issue fresh equity to the investor. The current capital base is around Rs 40 crore, and with an infusion of Rs 50 crore, it would go up to Rs 90 crore, Ms Reddy said.

Another large player Basix has investors like IFC Washington, US-based Shore Capital International, Dutch fund Tridos, HDFC and ICICI Bank. It is in talks with a Quebec-based co-operative bank, Desjardins and the Small Industries Development Bank of India (Sidbi), a senior Basix official informed.

Desjardins has total assets worth $1,35,126 billion and 922 service centres. Basix plans to raise $15-20 million for the MFI and the bank within the group. Experts feel that foreign funds entering the sector would lend it a touch of professionalism, global exposure, new networks, higher standards and ethics and a natural transfer of global expertise.
Source : Economic Times

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