Microfinance institutions (MFIs) are planning to raise over Rs 1,000 crore through debt instruments such as non-convertible debentures (NCDs) and commercial papers (CPs) during the current financial year. Till few months ago, only a few banks subscribed to the debt issues, but now MFIs are looking at a wider base of institutional investors, including mutual funds, insurance companies and foreign institutional players.
Recently, Hyderabad-based SKS Microfinance raised Rs 75 crore through NCDs and placed it with Standard Chartered Bank. The NCD was listed on the Bombay Stock Exchange (BSE) and subsequently purchased by the FII arm of Standard Chartered Bank. Similarly, Hyderabad-based Spandana raised Rs 80 crore through NCDs which is now placed with Standard Chartered, Mauritius, after being listed on the stock exchange. The listing of NCDs is necessary for transferring these to FIIs as they are not allowed to directly purchase them from the MFIs.
Buoyed by its earlier success, SKS is now planning to raise another Rs 175 crore through NCDs, while Spandana is planning to mobilise Rs 220 crore through this instrument and is in talks with several insurance and mutual fund companies. Another small scale financier, Share, is planning to raise Rs 300 crore through the NCD route. The placement is likely to be executed in three tranches during the current financial year. Kolkata-based Bandhan is also looking at raising Rs 100 crore through bonds and CPs, while Hyderabad-based Asmita is looking to mop up around Rs 150 crore through NCDs.
“MFIs cannot mobilise savings, so we need to look at products beyond term loans for funding. Once we connect with the market, we can look into bonds issuance with a tenure of even three years, which will ensure constant cash flows. As against short-duration bonds spread over one year generally. Thus we will not have to make bullet or one-time repayment. We are also discussing with financial institutions for partial guarantee of the bonds so that the rates are attractive.
Several mutual funds and insurance companies are also showing interest in the issue,” said Share Managing Director M Udaia Kumar. “Earlier, only few banks took interest in NCDs by MFIs. Now insurance and mutual fund houses are also interested in NCDs by MFIs,” said an executive from Asmita. MFIs traditionally relied upon bank loans and securitisation, whereby they sell a pool of microfinance assets to a bank at a discounted rate. More recently, MFIs have been selling rated pool to banks for a better deal. However, MFIs rely on term loans for a bulk of their disbursal requirement. After the credit squeeze in November-December 2008, banks had been cautiously lending to MFIs, even with increased rate of interest.
To meet the credit demand, SKS Microfinance for the first time during the last financial year raised Rs 25 crore thorough CP, and another Rs 25 crore through NCD, both placed with Yes Bank. Funds raised through rated bonds are generally priced 100-150 basis lower than bank loans, which generally charge around 11-13 per cent a year. Banks and other financial institutions prefer investing in MFIs as they have been largely unaffected by the economic meltdown. PE investment MFIs are eying private equity (PE) investments too. With most of these institutions being non-deposit taking NBFCs, they need to shore up their capital base to meet the CRAR (capital to risk-weighted assets ratio) of 15 per cent by April 2011.
Share Microfinance is looking at an equity infusion of $50 million in stages from International Finance Corporation, the private sector financing arm of the World Bank. The capital infusion will boost its CAR from 18 per cent to 28 per cent. Share has already diluted 65 per cent stake to Legatum Ventures and another 5 per cent to another PE firm. Last year, SKS Microfinance had raised $75 million through a PE deal, which increased its CAR to about 30 per cent. Recently, Bajaj Allianz announced a strategic investment of Rs 50 crore ($10 million) in SKS Microfinance, the first-ever investment by an insurance company in an Indian microfinance institution.
The equity deal was to be the first-ever investment by an insurance company in an Indian microfinance institution. Another MFI, Bandhan, is also eying a PE investment of Rs 50 crore this year which will increase its CAR to nearly 22 per cent. Asmita is looking at a similar PE investment of Rs 50 crore, which will increase its equity base to Rs 140 crore. Bangalore-based Ujjivan Financial Services recently sold about 24 per cent equity to US-based PE firm Sequoia Capital. Its promoter Samit Ghosh holds just about 2 per cent equity in the firm. Apart from Sequoia, Unitas Capital holds a major stake in Ujjivan.