Kolkata: One of India’s biggest microfinance firms, Bandhan Financial Services Pvt. Ltd, has raised Rs50 crore selling a 10.92% stake to government-owned Small Industries Development Bank of India, or Sidbi. It bought the stake paying a premium of at least Rs50 a share in a deal that values Bandhan in excess of Rs450 crore.

High stake: Bandhan Financial Services managing director Chandra Shekhar Ghosh says the investment is the biggest till now by any government-owned institution in the microfinance sector. Indranil Bhoumik / Mint

Under the deal with Sidbi, Bandhan is to offer an exit route to it after three years, according to the microfinance firm’s managing director Chandra Shekhar Ghosh. “We could find a strategic buyer for Sidbi’s stake, buy it back ourselves or go public," he added.

Sidbi’s investment in Bandhan is the biggest till now by any government-owned institution in the microfinance sector, according to Ghosh.

The biggest till the Bandhan deal was Sidbi’s Rs18 crore investment in Bharatiya Samruddhi Finance Ltd, another leading microfinance lender, which is better known as Basix. Sidbi acquired “a shade under 10%" in Basix in March, according to the firm’s founder Vijay Mahajan.

Sidbi had in October 2008 acquired 1.31% in Bandhan through conversion of a Rs1 crore loan into equity, and after the recent share sale its stake has risen to 12.23%, Ghosh added. Sidbi didn’t pay a premium for conversion of its loan into shares.

Bandhan, a non-banking finance company (NBFC) registered with the Reserve Bank of India (RBI), had an outstanding loan portfolio of Rs1,135 crore as on 20 December. Till date, Bandhan hasn’t written off any loan, and has recovered 99.92% of its loans.

In fiscal 2010, Bandhan expects to disburse at least Rs2,500 crore in small loans averaging Rs5,200, and post a net profit of around Rs60 crore, according to Ghosh.

The firm currently has an equity capital of Rs76 crore, and a net profit of Rs60 crore would translate into earning per share of around Rs7.90.

“Some 34 investors had evinced interest in acquiring stake in Bandhan," Ghosh said in an interview on Tuesday. “Some had offered better valuation than Sidbi, but we chose to offer the stake to Sidbi because others, mostly private equity investors, were asking us to commit huge returns, which we thought would force us to sacrifice our social objective of inclusive growth."

“We have known Bandhan since its inception," said N.K. Maini, Sidbi’s executive director. “Sidbi focuses on making finance available in states such as Bihar, Jharkhand, West Bengal and those in the northeast… Bandhan is a big player in these states."

Founded in 2001, Bandhan started microfinance lending a year later with a Rs20 lakh loan from Sidbi, Ghosh said.

Not just Bandhan, most microfinance firms received their first line of credit from Sidbi, said Maini.

Microfinance lenders in India are growing at breakneck speed—their combined loan assets have swelled from just Rs900 crore to at least Rs11,700 crore between 2005 and 2009.

Sidbi’s investment in Bandhan is a “very positive development", which indicates that government-owned institutions such as Sidbi are recognizing that “microfinance’s potential in India has just begun to unravel", said Vineet Rai, managing partner of Avishkaar Goodwell—a Mauritius-based fund that supports microfinance lenders in India.

Sidbi has recently secured a line of credit of €85 million (around Rs570 crore) from German development bank Kreditanstalt fur Wiederaufbau (KfW) for lending to mirofinance firms.

“After the KfW deal, Sidbi was expected to lend and invest more aggressively in the microfinance sector," said Rai.

A year-and-a-half ago, Sidbi launched a Rs500 crore fund for investing in microfinance firms. “Sidbi is offering equity support to a host of microfinance institutions that have registered themselves with RBI as NBFCs," said Maini. Bandhan turned itself into an NBFC a year ago.

“Sidbi helped build the microfinance sector just like Nabard (National Bank for Agriculture and Rural Development) helped build the SHG (self-help group) model," said Basix’s Mahajan.

The Rs50 crore share sale will shore up Bandhan’s capital-adequacy ratio (CAR) from 13.28% to 17.23%, according to Ghosh. CAR is a measure of a finance company’s risks expressed as a percentage of its capital.

“We can now raise over Rs1,600 crore of bank loans, but in the next fiscal, we may not need more than Rs1,100 crore," Ghosh added. “We have already secured a line of credit of Rs1,000 crore… With this share sale, we have met our capital needs for at least a year."

Bandhan aims to disburse Rs4,000 crore in fiscal 2011 and add at least one million borrowers. It currently has around 2.5 million borrowers spread in 14 states.