MFIs scout for domestic equity ahead of bank licence

Microfinance Institutions (MFIs), which have been keen contenders of small bank licence from the Reserve Bank of India (RBI), are faced with a roadblock in complying with norms related to domestic equity holding. The RBI norms do not allow foreign shareholding in private banks to go below 26 per cent.

However, in India, more than 90 per cent of MFIs have around 80 per cent foreign equity in the form of private equity (PE) investment. This is on account of a Securities and Exchange Board of India (Sebi) rule, which does not allow domestic private PE investment in non banking financial companies (NBFC). Thus, while almost all big MFIs, which are registered as NBFCs, keen to convert into a bank, hardly a few are now eligible for the licence.

While MFIN (Microfinance Institutions Network), the representative body on MFIs, is taking up the matter with Sebi, MFIs are aggressively scouting for domestic investors.

According to the RBI guidelines on small banks in the private sector, released on November 27, the foreign shareholding in them would be according to the foreign direct investment (FDI) policy for private-sector banks. According to the current FDI policy, the aggregate foreign investment in a private-sector bank from all sources is allowed up to 74 per cent of the paid-up capital of the bank (up to 49 per cent through automatic route; beyond 49 per cent up to 74 per cent through approval route). In its recent guidelines, the RBI had added that at least 26 per cent of the paid-up capital would have to be held by residents, subject to conditions.

"There is a significant interest among MFIs to apply for a banking licence. We will take up the issue of having domestic PE in NBFC MFIs, which are applying for banking licence, with Sebi," said Alok Prasad, CEO of MFIN.

Already, MFIs are scouting for domestic equity. Bangalore-based Ujjivan, which is planning to apply for a small bank licence, has already started discussions with insurance companies for increasing domestic equity. At present, about 85 per cent of the MFIs equity is held in the form of foreign shareholding.

"We are talking to a number of domestic investors, including insurance companies, so as to enable us to increase our domestic stake . We will also talk to Sebi for relaxation of norms governing domestic PE in MFIs," said Samit Ghosh, founder and CEO of Ujjivan Financial Services and president of MFIN.

Resident individuals or professionals with 10 years of experience in banking and finance; and companies and societies owned and controlled by residents will be eligible to set up small finance banks. Existing NBFCs, MFIs, and local area banks that are owned and controlled by residents can also opt for conversion into small finance banks.