In May, Blue Orchard Finance, a Geneva-based fund, got its debt market instrument, dedicated to micro loans, rated by global rating agency Standard & Poor’s (S&P). This deal is one of many happening in the global capital markets to fund microfinance ventures.
However, India has been untouched by this phenomenon and the $4 billion (Rs16,200 crore) domestic microfinance industry has, so far, been unable to access global capital markets. To be sure, some large Indian microfinance ventures have started receiving equity, but overseas debt remains a far cry.
Indian microfinance institutions (MFIs) are constrained by their scale and also regulatory structures that limit their access to foreign funds even as industry players say that overseas debt is crucial to service the $45 billion demand for microfinance in India.
“In the international markets, investors are usually not attracted by issuances less than $100 million. Indian MFIs do not have that scale yet,” says Alok Prasad, head, strategy and business development and business manager, microfinance, Citibank India.
An overwhelming majority of Indian MFIs are trusts, non-governmental organizations (NGOs) and cooperative societies. Only large MFIs such as Share Microfin Ltd, SKS Microfinance and Basix have converted themselves into non-banking financial companies (NBFCs), a vital precondition to access global markets.
Trusts and NGOs have small equity bases of Rs10-15 lakh and are dependent on charities and grants. But to turn into NBFCs, they require a capital base of at least Rs2 crore. In the absence of that, the only way they can access foreign funds is through external commercial borrowings—up to $5 million annually.
Even those who are willing to shore up their capital base and become an NBFC do not find it easy to get the licence from the Reserve Bank of India (RBI). Says the chief financial officer of a large MFI that migrated from being a trust to an NBFC about a year back, “Even though we had an equity base of more than Rs2 crore and a proven track record, RBI took three years to give us an NBFC licence.” He didn’t want his institution identified.
Currently, only a handful of MFIs can raise money on the strength of their balance sheets. Hyderabad’s Share Microfin plans a Rs200-300 crore bond issue in the next 18 months. “Today, microfinance firms borrow at 11-12% from banks. Add to that 10-11% transaction costs, and another 2% as cushion for debt defaults. So we can lend to the end beneficiary at less than 23-24%. If we are able to access the overseas bond markets, we will be able to offer cheaper loans,” says managing director of Share Microfin Udaia Kumar.
N.V. Ramana, managing director, Basix, says that a rating mechanism will make it easier for MFIs to raise money from international markets.
Indian rating agencies Crisil Ltd and Care have in fact already started the process. Says Krishnan Sitaraman, head, fund services and fixed income research at Crisil: “We have evaluated about 100 institutions, mostly on behalf of the Small Industries Development Bank of India, which offers loans to MFIs. Now commercial banks are showing interest in MFI’s ratings as they want to lend more in this space.”
Indeed, commercial banks have started looking at microfinance as a business opportunity. The State Bank of India recently announced plans to reach out to 100,000 rural households by end-2008 with basic financial services.
Private sector lender ICICI Bank Ltd is looking at “incubating” microfinance activities.
Even foreign banks are aggressively investing in microfinance ventures. Recently, SKS Microfinance and Citibank announced a Rs180 crore financing programme where Citi purchases loans that are ‘originated’ by SKS.
This means SKS lends the money and then transfers the loan or asset to Citi. With such activities on the rise, MFIs hope regulatory authorities will give them more elbowroom for fund-raising activities in global markets.
According to Gary Kochubka, director, emerging markets structured finance at S&P, the main challenge is how to scale. “Unless there is a local restriction on MFI borrowings, there would be no reason to exclude Indian MFIs from participating in Blue Orchard kind of securitization deal,” he says.