India: PEs Hand-hold Transition of MFIs to Small Finance Banks

Feb 2016
India, February, 24 2016 - Private equity (PE) investors have put in substantial amounts in microfinance institutions (MFIs) and non-banking financial companies (NBFCs) over the years.

Now, with many MFIs getting in-principle nod to become small finance banks (SFBs), some PE investors are expanding their role to guide and ‘hand-hold’ them during their transformation to SFBs. 
According to Reserve Bank of India (RBI) norms, SFBs have to start operations by April 2017. 
Those who have invested in MFIs come with focus, domain expertise and a track record for impact investment, say two executives with a public sector bank that had lent to them. 
The assistance could range from guidance at the board level to developing IT systems as SFBs need to have an edge and control costs as they scale up operations.  
“We are enabling them in entire capital raising and capital restructuring with the help of our relationship with domestic investors," says Venky Natarajan, managing partner, at Rockefeller Foundation-backed Lok Capital.  
The RBI, from the 72 applicants, granted in-principle approval to 10 entities to start SFBs. Among these are eight MFIs including Lok Capital-backed Suryoday, Utkarsh, Ujjivan and Equitas. Natarajan is the chairperson of the transformation committee at a couple of these licence-holders. 
“We are also helping them in a part of business transformation, especially on the technology front. We are providing these companies with consultants in our network who have worked as CIOs in large companies," he says.  
Sanjay Agarwal, managing director and chief executive, Au Financiers, says it is not just the capital that the PE investors chip in with. There is also a lot of thought behind such investments. It is long-term money. They are aware of the ups and downs the businesses face, including a slowdown for a year or two. Entities such as Equitas, Ujjivan Financial Services and Utkarsh Micro Finance have 93%, 90% and 85% foreign holding, respectively. 

The association of investors also brings credibility to enterprise (bank). For example investment from a multilateral funding agency could bring such support, he said. Jaipur-based NBFC Au Financiers has received in-principle nod for SFB. Its investors include Warburg Pincus, ChrysCap, IFC and Kedaara Capital. 

PE players are also chipping in with operational help. Vibha Batra, senior vice president and co-head financial sector rating at ICRA, says in some instances (MFIs turning into SFB), PE players are also providing board supervision and  assisting in building systems and processes, helping the company scale up. 
PEs with exposure to the financial sector units understand that in retail business such as lending to small and medium enterprises (SMEs), a mainstay of SFBs, patience is necessary. Such realisation enables promoters to think of long-term, Batra says.   
While PEs definitely add value in association, they also need to factor in the regulatory angle — participating in the working of units, which deal with public money. 
A PE adviser at a multinational professional services firm says as SFBs are going to solicit deposits from public, the RBI as sector regulator was concerned about safety of money. 

The RBI will not like investors with dominant stake to control operations of SFBs. The banking regulator is always concerned about risks on fund diversion.


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