Microfinance institutions diversify funding by tapping bond market

MFIs issued NCDs worth Rs 576 cr last fiscal, up 162% y-o-y

Microfinance Institutions (MFIs) are in the process of diversifying their sources of funding by tapping the Non-Convertible Debentures (NCD) market. Though bank funding still contributes a larger share of funding for these MFIs, a growth in NCD issuances over the last few years has been the trend.

 

Data from IFMR Capital shows that in the last fiscal, MFIs had issued NCDs worth Rs 576 crore, recording a growth of 162% year-on-year while in the current fiscal they have already raised a little over Rs 300 crore. Bulk of the issuances are seen in the last quarter of the fiscal.

 

“Their investments in long term NCDs issued by MFIs reflect the increased confidence in the microfinance sector by Developmental Finance Institutions (DFIs) over the last 6 months. The alternative source of funding will help MFIs diversify their borrowing sources, reduce concentration and meet their business plan requirements in a more efficient manner,” said Kshama Fernandes, CEO of IFMR Capital.

 

According to data, during FY13 only 4 MFIs were able to secure funding through the NCD route while FY14 saw 17 MFIs issuing NCDs. NCD issuance as a proportion of total debt funding to MFIs has marginally increased from 3.4% in FY12 to 3.8% in FY14. However, NCD issuances in Q1 FY15 total almost 50% of the total volume of FY14 issuances.

 

“Banks remain the dominant funding channel and enjoy priority sector lending benefit on their lending to MFIs. The NCD route for fund raising is relatively new and, at present, quite limited in its relevance to MFIs. It, however, does represent a significant shift in the funding strategy adopted by MFIs,” said Alok Prasad, CEO of the Microfinance Institutions Network (MFIN).

 

According to Prasad, some MFIs may be able to get fairly attractive pricing on their NCD offerings. But from a cost of funds perspective, it may not be particularly advantageous for most. “I believe the NCD activity by MFIs may further pick up momentum in the last quarter of the current fiscal,” he added.