Bangalore, India, December, 30 2009 -
The year 2009 may go down as the watershed year for the Indian microfinance industry. Marked by strong growth and pioneering deals the industry is riding high, growing at a rapid pace of 100%-200% year-on-year.
Attracting attention from mainstream investors, the sector accounted for 40 percent of all Private Equity deals in the past 18 months. There were 11 PE deals worth $178 million during the financial year 2009, compared to three deals worth $52 million in 2008, according to Venture Intelligence.
A plethora of reasons like huge untapped rural market, lower delinquency rates, high resilience, Union Budget emphasis on rural development and a volatile world economy have made investors flock to this segment. MFIs have reported growth in outstanding portfolio at a CAGR (Cumulative Annual Growth Rate) of 80 per cent and ROE (Return on Equity) of 30 per cent between 2003 and 2008. According to the 2008 microfinance industry report by Intellecap, the current Indian MFI market is around $1.5 billion with a penetration of around 10 per cent while the overall market size is estimated to be as high as $50 billion. Even the MFIs seem to be well prepared to exploit the new opportunities and take their business through uncharted ways like experimenting with various financial instruments like non-convertible debentures (NCDs), commercial papers, IPOs mutual funds etc.
From the global funders, there was a steady flow of funds though the investment cycles turned a little longer due to credit crisis. India Financial Inclusion Fund (IFIF), an off-shore India-focused equity fund for microfinance companies and enablers, has achieved a final close of $90 million. Incorporated in Mauritius last year and advised by Hyderabad-based Caspian Advisors, IFIF has raised commitments from the likes of UK’s CDC Group ($30 million), Global Microfinance Equity Fund and Switzerland’s Social Investment Services. Since its inception it has made a gross total investment of $30 million in MFIs like Equitas Microfinance, Trident Microfin, to name few.
Grassroots Capital’s global microfinance equity fund, mainly meant for Indian microfinance sector, received investments worth $60 million (approx) from Dutch Pension Fund PGGM. In the last quarter, India’s EXIM Bank was able to raise $100 million loan from the Asian Development Bank. The investment arm of World Bank, International Financial Corporation also committed INR 350 million in Rajasthan-based NBFC, AU Financiers Pvt. Ltd. Entering India for the first time, Incofin, a Belgium based microfinance company, has picked up a 34 per cent stake (Rs 8 crore) recently in Asomi Finance Private Ltd. Other institutions like IFC and Blue Orchards (Switzerland) too are showing a keen interest to invest in Asomi Finance Pvt Ltd.Domestic Market
Back in the domestic market, the Indian microfinance sector witnessed the first ever listed non-convertible debentures issued by Hyderabad-based SKS Microfinance which has raised Rs 75 crore by issuing one-year NCD at a coupon rate of 10%. Listed on Bombay Stock Exchange, the NCDs have been placed with the Standard Chartered Bank’s Foreign Institutional Investments (FII)7. The company chose to raise funds through debt so that it could match its debt with the recently raised equity and its total equity capital is placed at about $135 million. Following its footsteps, Tamil Nadu-based Grama Vidiyal Micro Finance Limited (GVMFL) plans to raise Rs 100 crore by way of NCDs. Prior to this it had raised $4.25 million (Rs 21.7 crore) from private equity investors including Micro Vest, Amar Foundation and Unitus Equity Fund. Spandana Sphoorty Financial Ltd of Hyderabad also raised Rs 80 crore ($16.74 million) in the same manner.
Microfinance Institutions are also venturing into Credit Rated Securitization deals, to access funds at a lower cost. Securitisation is the process of converting existing assets or future cash-flows into marketable securities. In the case of microfinance, the loans are written in the books of the MFI and sold as future receivables to the bank. “A credit rated securitisation deal will give a pricing advantage of 100-150 basis points as against a term loan. This will further reduce the cost of funds. Also rating by an independent agency assures the investors of the portfolio quality,” claimed Dilli Raj, Chief Finance Officer, SKS10. The company’s securitized portfolio worth Rs. 137 crore (Rs. 1,370 million) with YES Bank has been rated by Credit Analysis & Research Ltd. (CARE) as PR1+ SO (Highest Safety) rating in October this year. The Securitization enables YES Bank to purchase from SKS 1, 58,878 micro loans offered to SC, ST and other minority sections of the society across 17 different states. Other MFIs including Spandana have used the securitization route to save on interest costs and make more efficient use of capital.
A recent micro-loan securitization, completed by IFMR Capital and Equitas Micro Finance, has enabled the first-ever mutual fund investment into the Indian microfinance sector. The Rs. 480 million ($10.4 million) transaction is backed by over 55,000 micro loans originated by Equitas Micro Finance, a Chennai-based microfinance institution with approximately 700,000 low-income clients. ICICI Prudential Asset Management, India’s third largest mutual fund, subscribed to a majority of the securities. Axis Bank, Dhanalakshmi Bank, and IFMR Capital also subscribed. Micro-loan securitization provides banks a profitable way to increase their investment in the microfinance sector through rated and tradable securities. They also benefit from the MFIs collection efficiency and NPAs of less than 0.5 per cent. SHARE Microfin Limited executed a unique rated loan assignment transaction of Rs 49.34 crore with YES Bank. The transaction involved rating identified loan receivables from micro clients, numbering around 104,000 borrowers, with an average loan size of Rs 4,700. The transaction has been rated A2+ (SO) by ICRA Limited.
Private Equity Bubble
Although the pouring investments are helping MFIs in actualizing their expansion and diversification plans, but the unconstrained flow of funds may soon be cascading as investors fear an approaching bubble. Since a large number of credit-rich companies are chasing a very few profit making MFIs, the market valuation of MFIs has inflated artificially. For instance, valuation of SKS rose to at least Rs2,000 crore in its recent round, and Spandana is expecting a valuation of at least Rs1,800 crore for its latest round. Most MFIs are raising funds now at approximately 10 times their earnings while many are doubling earnings annually, said Eric Savage of Unitus capital. Many investors have thus put on hold their investing plans due to such skyrocketing prices.
MFIs plan IPOs
This year Indian microfinance industry had its first brush with controversy when its largest MFI unravelled its plans for stock market floatation. There are fears among some of the industry’s leading figures that the SKS listing could further raise the pressure on the group to make profits, possibly at the expense of poor borrowers as was the case with Mexico’s Banco Compartamos, which went public in the year 2007. Its return on equity is more than three times the 15 per cent delivered by Mexico’s conventional lenders and was able to raise $450 million for a group of backers that had originally invested only $6 million. It ended up charging an annual percentage rate of interest of more than 100 per cent — about treble the global microfinance average from its poor borrowers.
Vikram Akula, the SKS founder and chairman has recently told the media that his group hoped to steer a middle path between the microfinance model proposed by Mr Yunus, where funds come from sources that do not expect to make significant returns, and the Compartamos model, where investors buy in because of the possibility of earning huge profits.
With its unprecedented growth, Microfinance sector have also recognized the need for a regulated financial environment. Till now, the lenders have been appraising credit risks on their own but now they are looking for institutional assessment of borrowers’ creditworthiness. Microfinance India Network (MFIN)—an association of microfinance lenders has come with a code of conduct, and took some concrete measures like not to offer above Rs50,000 to any single borrower and not more than three lenders should lend money to one individual. In another similar development, around 30 microfinance lenders jointly took a 5% equity interest in High Mark Credit Information Services Pvt. Ltd, a company that has obtained in-principle approval from the Reserve Bank of India to offer credit information services. Investors are also in talks to set up a Credit Information Bureau for keeping accurate records of its rising customer base.
Saving Schemes for Poor
SBI Mutual Fund has launched an equity-based micro-systematic investment plan, called SBI Chota-SIP. The plan, which aimed at low-income households, allows a person to invest in mutual funds with a minimum sum of Rs 100 a month. In line with the government’s increased emphasis on financial inclusion, Sahara Mutual Fund is planning to launch a daily systematic investment plan or SIP — Sahara Daily Fund — under which one can invest a minimum sum of Rs 10 ($0.2) a day. “This scheme is a trend-setter in the mutual fund industry, which provides opportunity to small investors to participate in the economic development and reap the fruits of financial inclusion as intended by the government,” Garg, CEO of Sahara Mutual Funds stated.