PEs still cautious about investing in MFIs

Though the microfinance sector is well past the crisis of 2010, private equity (PE) firms are still cautious on investing in the sector.

In FY13, a major chunk of investments in MFIs would be constituted by development agencies such as the International Finance Corp (IFC). According to rough estimates, PE investment in MFIs in FY13 will be Rs 600-650 crore, compared to Rs 500 crore in FY12. However, if the Rs 230-crore qualified institutional placement (QIP) by SKS Microfinance is excluded, the deals will be about Rs 350-400 crore, taking that Rs 100-150 crore will be raised in February and March.

This is peanuts when compared to the money made in the heydays of MFIs, before October 2010, when PE deals had touched Rs 1,500 crore.

Since the crisis, most of the PE deals are thanks to development finance institutions. For example, in FY12, the International Finance Corp (IFC), the private investment arm of the World Bank, invested Rs 135-crore in West Bengal-based micro lender, Bandhan Financial Services. IFC also invested in Chennai-based Equitas Holdings and Bangalore’s Ujjivan Financial Services.

“Most of the equity investors in MFI these days are either development or multilateral institutions. Very few PE firms are investing in the sector,” said Samit Ghosh, founder of Ujjivan.

In September 2012, IFC invested Rs 45 crore in Ujjivan. Investor FMO (Netherlands Development Finance Company) also invested Rs 2.28 crore in the company, adding to its earlier investment of Rs 32.6 crore.

Among others who received investment in FY13 is Equitas Holdings, a microfinance and micro-housing finance company, which received equity capital of Rs 140 crore. Of this, Rs 90 crore came from IFC. The rest came from Microventures and India Financial Inclusion Fund, which together invested Rs 50 crore in the company.

In another major deal, Intellecash Microfinance Network Company, a subsidiary of the Intellecap Group of companies, acquired a majority stake in Arohan Financial Services, a Kolkata-based MFI.

In the next few months, deals worth Rs 100-150 crore are likely to be stuck, according to Abhijit Ray, co-founder of financial services firm Unitus Capital.

“Before the end of this quarter, two to three deals could be announced, while five to seven deals can take place over the next seven months,” said Ray.

Some of the other prominent PE deals in the current financial year include the Rs 80-crore capital infusion in Janalakshmi Financial and around Rs 35 investment in Allahabad-based NBFC Sonata Finance. The leading investor in Sonata was Creation Investments, an alternative investment management company in Chicago. Other investors in this round include The Michael and Susan Dell Foundation and Swaminathan Aiyar, a renowned economist.

The MFI sector has been reeling since October 2010, when the Andhra Pradesh government had issued an ordinance that curbed fresh lending and recovery of loans in the state.

The move resulted in bad loans of Rs 6,000 crore, and this might wipe out the net worth of several Andhra Pradesh-based MFIs. Since then, PE investors in major MFIs, mostly based in Andhra Pradesh, have been scouting for exits. The crisis resulted in diversion of PE investments to MFIs outside the state.