Lok targets those who couldn't bag small finance bank licence

Of the 72 applicants, only 10 got provisional licence; a large number of companies still need foreign funds

Rockefeller Foundation-backed Lok Capital is not resting on its laurels after four of its portfolio companies got a 'in-principle approval' for a small finance bank (SFB) licence. It is now targeting those which could not get the approval from the Reserve Bank of India (RBI) for an SFB, through its third fund of $100 million that it is currently raising. It expects to have the first closure for this fund over the next couple of months.

According to RBI, 72 applicants sought an SFB licence out of which 10 were granted the in-principle approval. This includes Lok Capital-backed Suryoday, Utkarsh, Ujjivan and Equitas.

The Delhi-based impact fund has so far invested $23-25 million in four micro finance companies out of its $90-million corpus across two funds. All four micro finance companies from its portfolio of 15 investee companies bagged the SFB licence.

"There is a lot of interest among US investors now for the financial inclusion sector in India," says Vishal Mehta, co-founder and partner, Lok Capital, citing the excitement generated with RBI giving in-principle approval for the licence.

There is huge untapped banking potential in India as no effort has been put to realise it since late 1990s when four local area banks were awarded licences. One of these, Capital Local Area, based in Jalandhar, has been also awarded provisional licence for an SFB now.

"This only makes a stronger case for a fund like Lok Capital. Now we will have more secure and diversified pipeline for investment available for financial inclusion," says Mehta.

There is a large number of applicants from the microfinance sector including SKS Microfinance, who could not get the licence this time. But RBI plans to give 'on-tap' licence going forward. In on-tap licensing, interested entities can apply to the RBI for opening a bank at point of time.

Lok Capital's first fund was a $22-million one, which was deployed fully by 2010. The company raised its second fund of $65 million in 2012 from existing investors such as International Finance Corporation, Commonwealth Development Corporation, and KfW and new investors Proparco and ASN Novib. Social venture capital funds typically have longer horizons and lower return expectations than venture capital funds that invest in more commercially-oriented sectors.

Lok Capital's initial investments were primarily into micro finance companies. Later, the fund started targeting areas such as public health, education and low-cost housing to enhance its social impact.

It is now looking for increased investment in microfinance. "Whosoever has not got licence will require further capital for growth and we will be targeting them with our third fund," says Mehta.

Micro finance institutions are classified as non-banking financial companies in India, in which 100 per cent foreign direct investment is allowed. This gives funds such as Lok Capital to raise capital from abroad and deploy the same in India.