Sidbi to showcase MFIs in London to secure PE funds

After restructuring debt of micro finance institutions (MFIs), Small Industries Development Bank of India (Sidbi) is planning to lure private equity investors in London to infuse fresh capital in MFIs.

However, lenders and investment bankers said it was too early to expect PE funds to step up investment as the sector is still coming out of a crisis and problems of recovery in Andhra Pradesh continue.

S Muhnot, chairman and managing director of Sidbi said: “We will be meeting international investors soon (in London next month) and show them that the whole sector (MFI) has come out of it (problems).”

Lenders, including Sidbi, had finalised the restructuring package of five MFIs, giving them seven years to repay loans. The total debt restructured is just over Rs 6,400 crore. “These entities need capital to grow. Now is the best time to enter (for private equity) as the growth is yet to come. We will be showcasing companies also, but first we need to build the sector,” said Muhnot. “They need equity to scale up and make provisions.” B Ravindranath, executive director at IDBI bank and in-charge of the Corporate Debt Restructuring Forum, said these entities need capital to manage operations and grow the loan portfolio outside Andhra Pradesh.

MFIs have to address operational issues and improve recoveries in Andhra Pradesh. There no improvement in loan recoveries in Andhra Pradesh, they remain very low at around 20 per cent.

Private equity investors would wait for clarity on the regulatory jurisdiction before committing sizable amounts. According to Pawan Agarwal, director rating at Crisil Ltd, growth prospects for MFIs will remain subdued over the medium term. They would face challenges in raising capital.

Echoing Agarwal's view, a senior investment banker involved in MFI deals said money (equity) in the form private equity will not come easily till the recoveries in Andhra Pradesh improve and there is clarity on the regulatory structure. Agarwal said international social sector investment and debt fund would be interested in picking up stake in MFIs.

Mark Stoleson, CEO, Legatum, said: “Legatum believes that in order for debt and equity capital to once again flow to the microfinance sector, any ambiguity concerning the regulatory framework must first be addressed. The AP Act should be urgently repealed, and the RBI must re-establish its authority as the regulator of NBFCs.”

Legatum is a multi-billion dollar global fund managing proprietary capita and has majority stake in Share Microfin, one of the MFI's which opted for debt restructuring under CDR.

RBI's guidelines might also ease pressure on profitability as it has relaxed some onerous recommendations of the Malegam panel. The continuation of priority-sector status and steps to enhance transparency and governance will also improve stakeholder confidence, said Crisil.