By Biswarup Gooptu & Paramita Chatterjee, The Economic Times
BANGALORE: Given the ongoing churn and regulatory uncertainty in the Indian microfinance industry, investors looking to hedge risks and diversify portfolios are now betting on the country’s non-banking financial companies.
Global development finance institutions, which have together invested close to $500 million (Rs 2,700 crore) in the Indian microfinance sector, are exploring opportunities in the NBFC space – another sector that promises financial inclusion for India’s poor.
“We would be very keen to look into the NBFC space. They fill the gap that exists between what MFIs in India do currently and where banks generally don’t go,” said Michael van den Berg, regional manager of Europe, Caucasus and Asia at Triple Jump.
Triple Jump, the Netherlands-based microfinance-focused investment manager, currently invests in India through social venture capital firm Lok Capital, which has invested in microfinance firms Ujjivan and Janalakshmi as well as in Vistaar Financial Services, a Bangalore-based NBFC. According to van den Berg, returns from NBFC-focused investments are at par with the investments in microfinance institutions.
“Internal rate of returns of 15-20 per cent over time should be attainable.” The Rs 26,000-crore microfinance sector has been in fire-fighting mode since late 2010, when Andhra Pradesh, the hub for microfinance in India, imposed tight regulations on micro-lending firms, citing usurious interest rates and the use of coercion to recover loans.
Moreover, the recommendations by the Malegam Committee and the delay in presenting the Micro Finance Institutions (Development and Regulation) Bill-2012 in Parliament have left global investors looking for alternative investment opportunities.
“The regulations (proposed by the Malegam Committee), while helpful from an investor perspective, present challenges to our General Partners especially around where the margin rates are going to be and the interest rate constraints,” said Maria Largey, investment manager with UK’s CDC. “We will probably feel the effects of the crisis for some time.”
In contrast, NBFCs focused on micro, small and medium enterprises have seen an increasing flow of investments, with many raising capital in the recent past.
Vistaar raised Rs 40 crore in its Series B round of financing from new investors Lok Capital and Omidyar Network in August. Separately, Ahmedabad-based MAS Financial Services raised an undisclosed amount in growth capital from German development financial institution DEG during the same period. Also, Patnabased Saija Finance raised $4.5 million from Accion and Pragati India Fund earlier this June.
“NBFCs have strong potential to grow with the growth of economy, in fact much faster, which will work as a very powerful enabler for attracting the investment,” said Kamlesh Gandhi, chairman and managing director, MAS Financial Services. Retail lending by NBFCs is expected to be around Rs 4 lakh crore by 2013, according to ratings agency CrisilBSE 0.96 %.
NBFCs typically lend between Rs 5,000 and Rs 40,000, with interest rates depending mainly on the ticket size. The amounts that MFIs lend tend to be much lower and they target consumers who earn between Rs 3,000 and Rs 5,000 a month.
“There is an increasing amount of private equity coming to NBFCs and we expect risk capital interest to grow even further. Private equity knows that there is a huge under-served market, and NBFCs can access the same in a more efficient manner,” said Ramakrishna Nishtala, co-founder and chief operating officer, Vistaar. Recent regulations by RBI have also brought greater confidence to investors.
The country’s central bankBSE 1.48 % has mandated that the NBFCs can securitise loans only after holding them for a minimum period in their books. “The RBI wants to ensure that there is no fly-by-night lending taking place in India,” said Sanjeev Krishan, executive director at PricewaterhouseCoopers .
“NBFCs now have to take greater responsibility of the assets that they hold.”
By G. Naga Sridhar, The Hindu Business Line
Microfinance institutions are hoping for an early relaxation of norms on Non-Banking Finance Companies-MFIs by the RBI.
“The discussions are currently on with the Reserve Bank of India of India to address operational challenges in implementation of NBFC-MFI norms,” a senior executive of Microfinance Institutions told Business Line on Thursday.
“The response of the RBI to many of our concerns is positive. At this stage it can only be stated that relaxation of norms is likely very soon,” he added.
Dr D. Subbarao, Governor, RBI, had on Wednesday hinted that capital adequacy and provisional norms could be relaxed in a phased manner.
The existing norms prescribe a minimum entry capital of Rs 5 crore to be labelled as NBFC-MFI, which is tough for small MFIs to meet. Also, the 12 per cent margin restriction adds to the entry barrier. The RBI is likely to review these norms, among others.
However, this move may help small MFIs; the expectations of big players in the industry are slightly different.
“The relaxation of entry capital norms will certainly help smaller MFIs. However, in view of the paradigm shift in the microfinance sector, it is no longer enough to meet entry barrier norms,” Mr S. Dilli Raj, Chief Financial Officer, SKS Microfinance Ltd, said.
The focus now is on quality of assets, efficiency of operations, compliance, transparency, governance and globally benchmarked customer protection practices, he added.
The likely revision of norms by the RBI could be more Andhra Pradesh-centric in view of the prevailing situation in the State, the biggest market for MFIs prior to October 2010.
“Most parts of the existing regulation are good for the industry, expect maybe the provisioning norms. Apart from tweaking this a bit, the RBI may relax norms with an AP-specific focus,” Mr P. N. Vasudevan, Managing Director, Chennai-based Equitas Microfinance, said.
Hyderabad/Bangalore – The recommendations of M. V. Nair Committee on Priority Sector Lending has come as a big relief to Non-banking Finance Company-Microfinance Institutions.
The committee, constituted by the Reserve Bank of India, has recommended that 5 per cent of bank credit to NBFCs could be classified as priority sector. It also states that securitised loans could also be classified under the priority sector.
The NBFC-MFIs, which are still facing funds-crunch owing to the adverse impact of the Andhra Pradesh microfinance crisis, stand to gain significantly if the recommendations are implemented, say experts.
“We are very happy with the recommendations. This is one more signal of the RBI’s and banking sector’s support to MFIs,” Mr Alok Prasad, Chief Executive Officer, Microfinance Institutions Network, told Business Line on Tuesday.
The recommendations also indicate that the ‘best way’ forward for financial inclusion is the robust partnership model between banks and MFIs, he added.
The decision to allow banks to get portfolio directly from MFIs is welcome, said Mr Mathew Titus, Executive Director, Sa-Dhan.
“It is a big challenge for banks to source good-quality loan portfolio. Though NBFCs offer small-ticket loans, they are mostly good-quality ones.
“This will also be a new window of opportunity for non-financial agencies who may want to enter this business of purely originating and passing on portfolio to banks,” he added.
More clarity needed
There is also need for more clarity in certain aspects. “How do banks differentiate between normal NBFC and NBFC-MFIs is not clear,” said Mr P. Kishore Kumar, Chief Executive Officer, Trident Microfin.
All women loans can be considered as weaker section loans, says the panel. “This is good because all MFI advances to women will now get this status. As of now this is only applicable in case of loans to women belonging to reserved categories,” Mr Kishore Kumar said.
The Union Rural Development ministry would sympathetically consider the state government’s request for Rs 100 crore in the current financial year to set up a proposed non-banking finance company (NBFC) that is specifically meant to serve the microfinance needs of self-help groups.
Speaking to reporters here today, Union Rural Development minister Vilasrao Deshmukh said the state was one of the best performers in the implementation of rural development schemes, and the women’s self-help groups in the state were a model for the rest of the country.
“The government of India will sympathetically consider the requests because of the good performance of the state,” he said.
The minister was in the state to review the implementation of the central rural development schemes. Along with the SHG funds, the Union ministry would also get in touch with the Planning Commission to sort out the issue of funds under rural roads scheme, Deshmukh said.
According to chief minister Kiran Kumar Reddy, who apprised the minister of the situation, the state was not getting funds under the Prime Minister Grameen Sadak Yojana (PMGSY) because it had already achieved road connectivity to rural areas.
The NBFC would get Rs 500 crore from the Centre, along with contributions from the three to four banks and the state government. It would serve the second and third-round borrowing needs of the SHGs, Reddy said.
According to the minister, at more than Rs 7,000 crore, Andhra Pradesh’s expenditure on Mahatma Gandhi National Rural Employment Guarantee Scheme (MGNREGS) was the highest in the country for the last financial year.
The flagship programme employed 5.5 million households in the year, while the state’s performance in other schemes for rural housing, drinking water and self-employment of BPL families was one of the best in the country, Deshmukh said.
The chief minister said the state had been allocated Rs 11,509 crore by the rural development ministry for its schemes this year. The state also put in funding proposals of Rs 150 crore over three years for skill development of 1.5 million youth.
It also sought increase in funds for employment guarantee scheme and unit cost of housing schemes.
The proposals include upgradation of the Andhra Pradesh Academy of Rural Development (APARD) to a university.
From Deccan Herald
The government is actively considering to put in place a regulatory framework to deal with ‘undesirable’ practices in the field of Micro Finance Institutions (MFIs).
“The government is considering to introduce a necessary legislation to regulate the functioning of MFIs keeping the legitimate interests of all stake holders,” Financial Sector Secretary in Ministry of Finance, Shashikant Sharma indicated while addressing a national conference on microfinance organised by Ficci here.
Pointing out that microfinance is an important plank in the government’s agenda for financial inclusion, he said “the sudden and rapid growth of MFIs has given rise to lending malpractices by some MFIs.”
“A strong and effective regulation of the sector is therefore imperative to put an end to undesirable practices and put the sector on the path of providing inclusive growth,” Sharma said.
The proposed legislation to regulate the functioning of MFIs would incorporate recommendations made by the Sub Committee of the Central Board of Directors of the RBI.
In the wake of growing criticism over lending malpractices by some MFIs like charging of high interest rates, coercive recovery processes, multiple lending practices, the RBI set up a high level committee to study the issues and concerns in the microfinance sector including ways and means of making interest rates charged by them reasonable.
The RBI’s Malegam Committee on microfinance in its report released in January this year has recommended creation of a separate category for Non-Banking Financial Companies (NBFCs) operating in the microfinance sector.
Such NBFCs could be designated as NBFC-MFI. The Committee has noted that “The future cannot be left entirely to the stating of good intentions. It, therefore, calls for strong regulation.”
It further said “we believe that if the recommendations made by us are implemented and if MFIs honour the commitments they have proposed in the agenda of the industry associations and if these efforts are accompanied by adequate and effective regulation, a new dawn will emerge for the microfinance sector and the need for state intervention will no longer exist.”
In the wake of reported harassment of small time consumers and farmers, who borrowed from MFIs, the Andhra Pradesh government came out with an ordinance making registration of MFIs with the state government compulsory.
ACCION Press Release
Microfinance Organization Commits Important Financial Support to Indian Partners Facing Tight Liquidity
ACCION® International, a pioneer and leader in microfinance, has announced that it recently issued credit guarantees through its Global Bridge Fund to two Indian microfinance institutions (MFIs). Through these guarantees, ACCION is underscoring its commitment to strengthening microfinance in India in the midst of funding constraints created by the uncertainty surrounding microfinance regulation.
On February 22, 2011, ACCION issued a $1 million standby letter of credit (SBLC) for its partner Swadhaar FinServe Pvt. Ltd. to secure a 24-month loan facility of Rs. 50 million, extended by Ratnakar Bank Ltd. In addition, on December 23, 2010, Bihar-based partner Saija Finance Pvt. Ltd. began accessing a 35-month Rs. 30 million loan facility extended by State Bank of India which was made possible by the issuance of a $500,000 SBLC from ACCION.
Over the last few months, most Indian banks have restricted their lending to MFIs pending the Reserve Bank of India’s release of final guidelines on how microfinance Non Banking Financial Companies (NBFCs) will be regulated. With these two SBLCs, ACCION’s guarantee facility is encouraging the flow of funds for important client services.
Swadhaar FinServe is an NBFC registered with the Reserve Bank of India in May 2008, and headquartered in Mumbai. Since ACCION issued its first credit guarantee to Swadhaar in February 2010, the SBLC has been collateralizing a 24-month rupee loan facility extended by Standard Chartered Bank to Swadhaar in the amount of $1 million to finance its on-lending activities. Swadhaar currently serves nearly 47,000 microentrepreneurs, with an outstanding loan portfolio of $8.8 million.
“These lines of credit are critical to meeting demand,” said Veena Mankar, CEO of Swadhaar. “The credit markets have tightened considerably for microlenders over the past few months, but we still need to serve our clients. They come first.”
Saija Finance Pvt. Ltd., an NBFC headquartered in Patna, India, currently reaches more than 15,000 microentrepreneurs, with an outstanding loan portfolio of $1.8 million.
“The demand for microfinance products here in Bihar is enormous,” said S.R. Sinha, chairman and CEO of Saija. “This guarantee has provided us access to an important source of funds to help us meet that demand.”
ACCION launched the first-ever loan guarantee fund for MFIs in 1984 to serve as a conduit between socially responsible investors and MFIs that, without the guarantees, would have limited access to financing from traditional lending institutions or local capital markets. Since then, ACCION’s Bridge Funds have provided guarantees for nearly $80 million to 28 MFIs in 12 countries. The Global Bridge Fund, a guarantee vehicle incorporated in 2005 to meet the demand for guarantees from MFIs located outside of the ACCION Network and beyond Latin America, leverages individual investments starting as low as US $2,000. To request a private offering memorandum, to receive further information about the fund or to make a loan, please contact Pablo F. Rieckhof at +1 202-393-5113 x1636 or email@example.com.
About ACCION International
ACCION International is a private, nonprofit organization with the mission of giving people the financial tools they need—microenterprise loans, business training and other financial services—to help work their way out of poverty. A world pioneer in microfinance, ACCION was founded in 1961 and issued its first microloan in 1973 in Brazil. Over time, ACCION has helped build 62 microfinance institutions in 31 countries on four continents. Those institutions are currently reaching millions of clients. In the United States, the U.S. ACCION Network is the largest microfinance lending network in the country and has served tens of thousands of clients with over $275 million in loans since the inception of its pilot program in 1991. For more information, visit www.accion.org.
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ACCION Technical Advisors India
+91 98867 59587
Global Bridge Fund contact:
Pablo F. Rieckhof
+1 202-393-5113 x1636