In what could be a revival of investor interest in firms offering credit to the poor, microlender Janalakshmi Financial Services Pvt. Ltd (JFS) has raised '65 crore in its third round of funding from private equity (PE) firms.
“Coming after a major crisis in the sector, this is a major transaction and is a clear sign that the tide is turning for microfinance,” said Ramesh Ramanathan, chairman of JFS, which focuses on lending to the urban poor.
The number of deals involving investments in microfinance companies has fallen this year although the quantum has remained almost the same.
In the first six months of 2010, seven investments worth $75 million ('336 crore today) were made in microfinance companies; between January and June, only four investments (including the one in JFS) worth $69 million have been made, according to Venture Intelligence, which tracks deals involving venture capital and PE firms.
Once a favourite with investors, the Indian microfinance sector has run into trouble after Andhra Pradesh introduced stringent regulations last year in response to allegations that microfinance institutions (MFIs) were charging usurious rates of interest, lending indiscriminately and, in the process, even driving some borrowers to suicide. There have been mass defaults in the state since then. Bankers have also withdrawn credit lines to such lenders, sending the microfinance sector into a deep crisis in its biggest market.
PE firm Citi Venture Capital International led the JFS deal. Existing investors such as Bellwether Microfinance Fund, Lok Capital, Tree Line Asia Master Fund (Singapore) Pte Ltd, and Michael and Susan Dell Foundation have participated as well. Bangalore-based Unitus Capital was an adviser on the deal.
With the latest round, JFS has raised more than '100 crore from investors in the past three years. It intends to use the proceeds for business development, including more disbursements.
“The fund-raising was not easy. It was a very difficult process. There are two main concerns that I would say investors have. Is there a clear ecosystem to operate in? What is a company's business model?” said Ramanathan, adding that JFS' business model of targeting the urban poor, its concept of offering a range of financial products and the strong technological support for its operations helped it raise the money.
Despite the ongoing uncertainty, the business of lending to the poor is expected to flourish in India in the long run. JFS estimates that the demand for microfinance in urban India is currently at '41,800 crore, and expects the market to grow to '1 trillion by 2015, at a 19% compounded annual growth rate.
“This is quite an extraordinary quantum of funds being raised by a microfinance company, particularly in the context of the microfinance crisis,” said Vineet Rai, founder and chief executive (CEO) of Aavishkaar Venture Management Services Pvt. Ltd, one of the biggest investors in MFIs in the country. The firm is looking at closing two more investments in microfinance companies in a month's time.
“This has to be seen as a vote of consent from investors for financial inclusion,” he said.
Rai cautioned that the JFS deal does not indicate that microfinance companies are completely out of the financing tangle as yet. “I think investors will still wait for another six to nine months to see how things pan out,” he said.
Currently active in 42 cities in 11 states, JFS has 66 branches, with outstanding loans of over '250 crore to more than 200,000 customers. Ramanathan is hopeful of raising another round in the next 12-14 months. “We will look at raising more than '65 crore in that round,” he said.
JFS has a unique two-tier structure. All promoter stakes are held in a not-for-profit holding company called Janalakshmi Social Services, while JFS is a for-profit urban microfinance company.
Financial advisory firm Unitus Capital expects a revival of deals in microfinance companies this year, as valuations have become more reasonable. “More deals will happen as there are a lot of people looking for equity deals. Banks are also coming around to lending to microlenders,” said CEO Eric Savage. “There are a lot of new investors, primarily Indian investors, who are very keen on these companies.”
Some of the regulatory uncertainty could have dissipated after the Reserve Bank of India put out new guidelines that seek to cap interest rates charged by microlenders and limit their profit margins, among other things, he said.
Source: i stock analyst