India: After Five-year Hiatus, Mutual Funds Turn to Investing in Microfinance Co...

Jun 2015
India, June, 11 2015 - Mutual funds have started investing in debt issuances of microfinance companies after a five-year hiatus. The lure of higher yields, top-grade ratings and shorter tenure of loans are prompting fund houses to park funds in microfinance securities.

Investments worth over Rs 1,000 crore have already flown into microfinance papers bearing 11.5-13% coupon rates. HDFC MF, SBI MF, Reliance Mutual, Kotak MF, and ICICI Pru MF, among others, have invested in papers issued by SKS Microfinance, Janalakshmi Financial Services, Ujjivan Financial Services and Equitas Micro Finance. All these papers yield 3-4% higher than top-rated securities issued by companies.

"It's an opportunistic view on the sector. These papers give us very attractive spreads and are much more than the best of corporate debt," said Lakshmi Iyer, head of fixed income and products at Kotak Mutual Fund.

Mutual funds had stopped investing in microfinance companies after the blowup in Andhra Pradesh in 2010, when several borrowers committed suicide due to alleged harassment by lenders. This crisis led to promulgation of various laws to control and regulate the scope of microfinance in the country.

"Microfinance, as a sector, has become more amenable to investments post the AP crisis. Lots of regulatory controls have been put in place... the sector is very stable for investments now. We expect the sector to do well in the years to come," says Navneet Munot, CIO at SBI Mutual Fund.

Fund houses are investing in secured debentures issued by microfinance companies. The security is in the form of receivables and fixed assets hypothecated (to itself) by microfinance companies. Women-dominated joint lending groups (JLGs) account for over 95% of the borrowers.

Banks - traditional lenders to microfinance companies - have become cautious while lending to microfinance companies post the AP crisis. Some of them also have internal caps on lending to smaller microfinance companies.

"MF investments will help us diversify our funding source. Funds on their part will get better yields on their investments. It is a win-win for both parties," said VS Radhakrishnan, MD, Janalakshmi Financial Services.

Loans disbursed to women groups (clusters) carry better weightage as their repayment rates are higher than the men clusters. Repayment rates are as high as 99.5% among women borrowers, making them eligible for better credit ratings. Microfinance debentures usually bear tenures of 12-36 months, but foreclosure by borrowers reduce the term to as low as 18-24 months.

"We're only lending to MFIs that have good repayment record and sound management. The profile of borrowers is clearly analysed before committing funds," said Kotak's Iyer.

Sentiment in the micro-finance sector has improved after the Reserve Bank of India (RBI) was appointed as the regulator of microfinance companies in the country in 2012. RBI has also been entrusted with sweeping powers to control lending rates and margins, apart from fixing prudential norms. Also, the Micro Finance Institutions Bill of 2012 mandates an interest rate cap of 26% by the companies, reducing the risks of political upheavals in the future.


Research Analysis Tools

The fund indexes, institution benchmarks and other market information displayed here are all Symbiotics designed analysis tools, created in-house by our analysts and experts. Symbiotics has one of the oldest track records in microfinance investment analysis dating back to the late 1990s; its indexes and benchmarks have been regularly used as markers by investors, asset managers, financial institutions and practitioners. These, as well as several other research products, are available through the Research Account. Click on the link below to find out more.

Learn More