Microfinance starts to rework a future outside Andhra

At a private equity conference in Bangalore last week, Ashwin Mahabaleswara exchanged pleasantries and contact details with a lot of people. He heads treasury and finance for Grameen Financial Services, a Bangalore-based microfinance company seeded by Grameen Bank of Bangladesh.

The Rs 20,000 crore microfinance sector was thrown into a tizzy last October when Andhra Pradesh issued an Ordinance that sought stringent regulation of the industry, following reports of a spate of suicides by harried borrowers. Andhra is the largest MFI market in the country, with over 60% of total business taking place there.

Over the past six months, the turmoil in the space has forced his company to slash its loan book by a third. Mahabaleswara said that for future growth, his company is looking at private equity options. The last round of funding was in 2008 when two EU-based funds MicroVentures and Incofin picked up a stake. The company now would have to get pro-active about raising capital, he added.

Another Bangalore-based company Janalakshmi Financial Services, managed to raise Rs 65 crore ($14.67 million) from private equity firms.

“The deal gives hope to many players,” Mahabaleswara said.

It appears that there is a ray of hope for companies like Grameen Financial and Janalakshmi Financial Services.

For the six months in this calender year so far, four deals worth Rs 153 crore ($69 million) were struck, according to a previous media report . This is against seven deals worth Rs 166 crore ($75 million) in the first half of 2010. This indicates that there are private equity investors who see an opportunity in the situation.

Another key aspect is that while bank lending to the micro-finance sector has slowed down, the growth of credit in the microfinance space is not that slow. According to RBI data on credit deployment by banks, micro-credit grew 16.5% to Rs 25,231 crore in May 2011. The overall non-food credit growth was 21.9% during the same period.

Credit rating agency CRISIL says that the funding position for the MFI sector, especially for the ones operating outside Andhra Pradesh, is expected to improve following the issue of guidelines by the RBI for MFIs that are non-banking financial companies (NBFCs). A credit rating analysis of Equitas Micro Finance, a privately owned firm, by Crisil shows that there is hope for companies that rework business plans and are successfully able to raise capital.

Firms like Equitas Micro Finance and Grameen Bank have written off investments in AP. Mahabaleswara said the company operates outside AP in other states like Tamil Nadu, Kerala, Karnataka and Maharashtra.

Companies like SKS Microfinance and Equitas have also decided to diversify their loan book by entering housing and vehicle finance spaces.

SKS recently completed a Rs 50 crore securitisation transaction with YES Bank. Mahabaleswara said Grameen Financial also completed a securitisation deal worth Rs 35 crore.

These are signs of a change of view from lenders.

Suhas Naik, COO at IL&FS Portfolio Management said that the sentiment was very positive when SKS went public. It turned very negative when Andhra Pradesh came up with the new ordinance. Naik now feels that it has turned neutral from negative.

“India is an under-banked economy and microfinance will remain a major financing mode,” Naik said arguing that it will take years for getting a large population in India to bank.

A Mumbai-based investment banker at a foreign bank said that institutional investors are not interested in backing microfinance companies in the secondary market for now. Hence raising equity through institutional placement is not an option for these companies, according to him.

Over the past six months, SKS Microfinance and SE Investments, two listed micro-finance companies, have lost 60% and 40% of their market value respectively.

Another banker, who also wanted to stay unnamed, said that the legislative risk in the business was too high.

However, the two bankers agreed that private equity investors could strike some smart deals due to a sharp fall in valuation of listed companies and overall weak sentiment. “Micro-finance is needed in a country like India. Private equity investors could strike bargains if they have a three to five year investor horizon,” the second banker said.

Reacting to comments that the centre had left microfinance in the lurch, senior-most RBI deputy governor, KC Chakrabarty told PTI recently that a uniform policy from the centre was indeed required. “They have at least survived the crisis. Also, luckily the problem has not gone out of control and out of Andhra,” said the same governor while assessing the sector as a whole.

(With PTI inputs)