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Sunday, September 25, 2011

Fundraising picks up among microfinance companies

This story first appeared in DNA Money edition on Thursday, September 15, 2011.

Investors are returning to Indian microfinance institutions (MFI), which faced difficulties in raising funds after the sector’s top firm, SKS Microfinance, faced regulatory scrutiny in Andhra Pradesh last year.

Andhra Pradesh had passed an Act in October last to stop microlenders such as SKS to collect dues from borrowers on a weekly basis and seek state approval for fresh advances, affecting prospects and fundraising ability of MFIs.

However, in the last few quarters, a few big-ticket placements have been made in microfinance companies by global and domestic investors, including at least three major deals since June, showing that investor confidence is being restored in the sector.

Ujjivan — a leading MFI and non-banking financial company (NBFC) — has received a funding approval of `100.50 crore ($21 million) from Sidbi and other public/private sector banks.

A week ago, Kolkata-based MFI Bandhan Financial Services Pvt Ltd raised Rs135 crore in private equity placement from the World Bank arm, International Finance Corporation (IFC). The deal, according to IFC, is its single-largest exposure in the Indian microfinance sector thus far.

In June, Bangalore-based MFI Janalakshmi Financial Services received `65 crore placement from investors led by Citi Venture Capital International. Among the few other players that managed to raise funds through the equity route is Delhi headquartered Satin Creditcare Network which raised around Rs100 crore ($22.3 million) from a bouquet of investors including $9 million from the US-based ShoreCap II Ltd and Danish Microfinance Partners K/S in December 2010 and February 2011, respectively.

Industry experts said that while SKS suffered mainly because of a large operations base in Andhra Pradesh, MFIs operating in other states have not been impacted so significantly. And after the Malegam committee report on the MFI sector, the Reserve Bank of India came up with its own set of guidelines which has helped instil some confidence and clarity in the sector.

Also, experts said MFIs like Bandhan, Ujjivan, and Janlakshmi raised money because they are different in their own ways.
Ganesh Rengaswamy, chief operating officer at the MFI-focused funding institution Lok Capital, said, “It could be the scale of operations, segment they cater to, transparency and customer satisfaction that are significant drivers for their fundraising. The second most important factor is their banking relationships and the confidence their banks or investors have in them or the individual promoters like Samit Ghosh (Ujjivan) and Ramesh Ramanathan (Janalakshmi).”

A few others feel the non-Andhra aspect also helped the MFIs attract equity and debt funding.

“There are institutions I am familiar with in AP which have scale and respectability but are still being looked at with some degree of caution when it comes to lending,” said a senior official from a leading PE firm.

Robin Roy, associate director, PricewaterhouseCoopers (PwC), said companies which have successfully demonstrated their ability and are operating efficiently will always be able to attract capital. “The better and more efficient players with economies of scale will have no issues accessing capital. Investors continuously keep looking at people with a good business model and a great performance track record,” he said.

Avinash Gupta, national leader - financial advisory practice, Deloitte Touche Tohmatsu I (P) Ltd, however, said a considerable portion of the funding being raised by the MFIs is debt.“It is more like a support to the MFIs because they do not have the ability to raise deposits. It would be interesting to see how the MFI story really unfurls in the coming years. There is a possibility that the MFIs may start functioning as pure-play NBFCs given the business prospects an NBFC offers are much more rewarding vis-a-vis an MFI,” said Gupta.

Update: September 26, 2011

Norwegian microfinance co. leads Rs 25 cr investment in Utkarsh's series B funding

Norwegian Microfinance Initiative (NMI) through its NMI Frontier Fund KS had led a Rs 25 crore series B investment in Utkarsh Micro Finance Pvt Ltd (Utkarsh). Intellecap was the sole advisor for this transaction.

The investment, according to Utkarsh senior management, will boost the company's growth plans. "It has come at the right time as the sector has started growing once again. Another important aspect is that all our investors have a strong bent for social sector and truly believe in double bottom-line approach. We strongly believe that this investment will facilitate further penetration of microfinance in the most underpenetrated geography in the country," said Govind Singh, MD and CEO, Utkarsh.

A registered Non-Banking Finance Company (NBFC), Utkarsh currently operates in 13 districts of Uttar Pradesh and Bihar. It has 56 branches, over 57,000 active clients and a loan portfolio of Rs 41 crore.

Henning Haugerudbr├ąten, Investment Director, NMI Frontier Fund, said that NMI was attracted by Utkarsh's commitment to serving the poor in areas of India characterised by high population, high incidence of poverty, and very low financial inclusion. "The potential for well-run MFIs like Utkarsh to make an impact in this region is tremendous, and we believe Utkarsh has the professionalism and commitment required to make a difference and to achieve the joint mission of Utkarsh and NMI on financial inclusion, This investment is also an attractive complement to NMI's other activities in India," he said.

Aavishkaar Goodwell (AG), an existing investor in the MFI also participated in this Series B round of investment in the company. IFC, a member of the World Bank Group is also an existing investor in Utkarsh and has been supporting the firm since March 2010.

Anurag Agrawal, co-founder - Intellecap, and senior vice president of the investment banking arm, said, "This investment is a reinforcement of our belief that, in spite of all that has happened over the last year or so in the microfinance sector, there is still a fundamental business proposition for microfinance in India and informed global investors are willing to commit significant capital to quality institutions who are doing good work on the ground to serve the large unmet demand for microfinance services. We are optimistic that this space will see gradual growth over the next few years, as it adapts to a changed regulatory environment."

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