New rule may bring back private equity to MFI

A clarity in the microfinance institution (MFI) with a new Bill in place appears to have paved the way for return of private equity (PE) in the sector, almost after a year. 

Over the next six months, the sector is set to absorb as much as Rs 600 crore of PE investments, according to deal makers. 

After a government regulation in Andhra Pradesh curbed the operations of the MFIs across the country, PE investors had been shying away from it, with the existing ones looking for an exit route. However, the draft MFI Bill presented by the government last month gave a fresh lease of life to the ailing sector, with the Reserve Bank of India slated to be its sole regulator. 

West Bengal-based Bandhan is close to sealing a deal with International Finance Corporation (IFC), a member of the World Bank group, for a Rs 135 crore equity investment by the end of this month. This would be one of the biggest PE deals in the MFI space after a government regulation in Andhra Pradesh led to a crisis in the whole sector. 

Chandra Shekhar Ghosh, managing director, Bandhan, confirmed that the deal would be stuck by the end of this month. 

Bangalore-based Unitas Capital was working on five PE deals worth Rs 200 crore for MFIs, said Abhijit Ray, co-founder and director of Unitas Capital. 

"Any industry goes through different phases, and long term investors do see opportunities in the sector. We could easily see as much as Rs 600 crore investment in the next six months," said Ray. 

Recently, Janalakshmi Financial Services, the Bangalore-based (MFI) raised Rs 65 crore from Citi Venture Capital International (CVCI). The MFI was looking at more than Rs 65 crore PE investment in the coming months, said sources. 

It is not just the mid- and small-sized MFIs, which are seeking equity investment, bigger ones like SKS Microfinance are also in the fray to tap more equity. 

SKS is planning to raise up to Rs 900 crore through a qualified institutional placement (QIP) of equity shares. This is in spite of the fact that the company incurred a loss — of about Rs 218.74 crore for the quarter ended June. This is the highest loss SKS has booked in a quarter. 

Market players believe that with the MFI sector almost stagnating due to regulations in the last nine months, there has been a substantial demand push. Also, in rising interest rate scenario and slowdown in urban demand, MFIs are seen as a good investment option, as they mostly operate in the rural areas. 

"We are planning to raise Rs 900 crore through QIP. Demand for micro loans has gone up after the crisis, and there is not much supply to cater it. Also, there is a rural buoyancy, as government spending has created good market in the rural areas," said Dilli Raj, chief finance officer, SKS.