PEs in talks with global institutions

PEs in talks with global institutions
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First Published: Mon, Nov 29 2010. 01 15 AM IST
Updated: Wed, Feb 09 2011. 07 18 PM IST
Mumbai: In a last-ditch effort to stave off a crisis in the Rs33,000 crore Indian microfinance sector, private equity (PE) investors are lobbying with multilateral development finance institutions to provide guarantees that microfinance institutions (MFIs) can furnish to ensure fund flows from Indian banks.
Debt funding from banks, which account for around 80% of the total funds available to the industry, has dried up in the aftermath of the crisis facing MFIs in Andhra Pradesh, where the state government has passed an ordinance tightening regulations governing the sector.
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PE investors are also engaging with international agencies to secure short-term emergency funding for MFIs in their portfolios to help them stay afloat until collections from borrowers stabilize.
In Andhra Pradesh, where the ordinance was passed in October prohibiting MFIs from charging interest that exceeds repayment of principal and resorting to coercive loan recovery practices, loan collections have dropped to 70% against around 98-99% in other states.
The head of a venture capital firm that has significant investments in many MFIs in India said that it was negotiating with development funding agencies such as the Washington-based International Finance Corp., an arm of the World Bank, and Germany-based KfW Bankengruppe for guarantees.
“It is essential to bring back the confidence among Indian banks to lend to MFIs again,” said the investor, who did not want to be named because his fund is engaged in discussions and no agreement on the guarantees has been finalized yet.
According to industry experts, guarantees by IFC and KfW, which are reputed institutions that have invested in the microfinance sector in India, could persuade banks to resume lending to MFIs pending the emergence of a clearer regulatory framework for microcredit in India.
On 22 November, credit rating agency Crisil Ltd put 12 MFIs on a rating watch, with the possibility of downgrading them later, saying that the crisis facing the sector in Andhra Pradesh could permanently damage the business model of MFIs by impairing—among other things—their ability to raise capital.
Industry estimates peg the total exposure of the microfinance sector to Andhra Pradesh at Rs.9,000 crore.
“The situation is very serious at the moment,” said one investor, who did not want to be named.
Vineet Rai, chief executive officer of Aavishkaar, a venture capital fund that lends exclusively to microfinance entities, confirmed that discussions with the development agencies are under way. The discussions “are at an early stage”, he said.
Apart from guarantees, PE funds are also seeking the help of intermediaries in the microfinance sector to arrange short-term funds for their portfolio companies.
“We are working on helping our portfolio companies get emergency funding from other sources,” said Venky Natarajan, managing director of Lok Capital, a microfinance-focused venture fund that has invested in MFIs such as Spandana Sphoorty Financial Ltd, Basix and Ujjivan Financial Services Ltd, out of its $22 million (Rs100.54 crore) fund.
According to a person involved in such transactions, PE funds are trying to tap international microfinance-focused funds such as Microvest Capital Management Llc, BlueOrchard private equity fund, Developing World Markets and ResponsAbility Social Investments AG to secure this debt. He did not want to be identified.
“The talks for such deals have started only two weeks ago. PE funds are looking for three to six month loans. Since these are short-term loans, interest rates are 200-300 basis points higher than the normal rates,” said the person. One basis point is one-hundredth of a percentage point.
Bangalore-based Unitus Capital is one financial advisory firm that is helping in arranging such debt.
“We are working on 10-12 deals to facilitate non-convertible and short-term debt facilities. The sector has shown growth in the past and things will improve with time. If institutions can see a way to help it out of the crisis then why not,” said Abhijit Ray, director of Unitus.
According to Sumir Chadha, managing director of Sequoia Capital India, which has invested in SKS Microfinance Ltd, such funding channels would be helpful to smaller MFIs that do not have any exposure to Andhra Pradesh, but are deprived of bank credit at the moment.
“Given the current scenario, it is uncertain where funding will come from. Some institutions that have sanctioned lines of credit are not disbursing money. But we have to explore all options,” said S.V. Raja Vaidyanathan, chairman and managing director of Chennai-based Asirvad Microfinance Pvt. Ltd.
MFIs themselves have reached out to investors seeking help in arranging short-term liquidity.
“We have made an appeal to private equity players to put together a kind of guarantee fund which can be drawn upon to compensate for any defaults on the part of MFIs,” said Vijay Mahajan, chairman of Basix, a Hyderabad-based microcredit lender and president of Microfinance India Network, an industry lobby.
Such a step may dilute the return on investment that PE funds were expecting from MFIs in their portfolios, but it would help the sector survive, Mahajan added.
Mahajan also said banks might regain faith in lending to MFIs if their PE partners could pump in some more equity as a measure of confidence.
Though PE firms don’t appear too enthusiastic about making fresh investments in the MFI space at the moment, Rai of Aavishkaar said they might consider it at some point if banks asked them to as a precondition for resuming fund flow to the sector.
Graphic by Yogesh Kumar/Mint
aveek.d@livemint.com
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First Published: Mon, Nov 29 2010. 01 15 AM IST