India: Private Equity open Taps for Microfinance again

Sep 2011
Kolkata, India, September, 29 2011 - The lull seems to be over. After spending a nine-month hibernation after the Andhra Pradesh MFI crisis, leading private equity (PE) players are again on the prowl to make a fortune in the country's micro finance space as the sector is crawling back to normalcy.

Equity deals worth $62 million (around 280 crore) took place in the last three-four months as investors are getting lured by the growth prospect of the MFI business in India even as the Reserve Bank of India (RBI) capped MFIs' lending rate at 26% a year.

Before the crisis rocked the sector in October last, MFIs had clinched PE investment worth $95 million. Although the RBI diktat will no longer allow MFIs to get fancy 50-60% return on equity (ROE), but it will still be in the 20-35% range which analysts tracking the sector said is quite attractive for any investor.

The likes of Citi Venture Capital International and Blue Orchard have closed equity deals with local MFIs in recent times reflecting the confidence of investors that the sector is returning to normalcy. The World Bank's private investment arm, IFC, has invested in Bandhan and may put in fresh equity capital in Basix soon.

"Private equity investors are showing renewed interest in the MFI space. We are seeing good traction from overseas investors, especially after the RBI had issued detailed circular on MFI funding," said Abhijit Ray, co-founder and director of Unitus Capital, which arranges capital for microfinance companies.

"With higher volume and improved operational efficiency coupled with good leverage and off-balancesheet funding, MFIs' return on equity will still be in the 25-35% range despite the new lending rate ceiling which is attractive enough for global PE investors," he said.

Before September last year, MFIs did business virtually without any regulation and earned fancy returns on their equity which was as high as 50-60%. Investors and banks have shunned the sector since September last when Andhra Pradesh slapped an ordinance on Microfinance institutions restricting their activity which led to a virtual stoppage in repayment of loans.

Now, RBI has been firmly pushing banks to start funding to MFIs again. This has given confidence to many investors and they have started investing in MFIs.

"Private equity investments are slowly flowing in the microfinance sector. It will further pick up once the regulatory issues are settled," Indian Private Equity & Venture Capital Association president Mahendra Swarup said. Analysts tracking the sector said that PE firms are happy that MFIs now operate in a regulated environment and have become more transparent than ever before. At least half-a-dozen PE investment materialised after the RBI issued the rules for the sector.


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