Top MFIs plan to raise funds through ECBs

Cash-starved microfinance institutions (MFIs) are queueing to raise foreign currency loans in the new year. SKS, Share, Bandhan and Ujjivan plan to raise up to $10 million each in the coming months.

The Reserve Bank of India (RBI) had recently allowed MFIs to raise up to $10 million a year through external commercial borrowings (ECBs). Interestingly, MFIs plan to raise funds through ECBs, even as the rupee continues to depreciate against dollar, and the cost of raising funds abroad shoots up. The rupee depreciated close to 20 per cent in the April-December period.

“We plan to raise up to $10 million in the next few months. There are a lot of private lenders in the SRI (social responsible investor) and the MIV (microfinance investment vehicle) categories interested in lending to MFIs. The cost of funds though ECBs would be lower than bank funds,” said Dilli Raj, chief finance officer, SKS.

MIVs are intermediaries that mobilise funds from investors to MFIs in developing countries, while SRIs, in theory, are investors involved in a social cause.

“We are working on raising $10 million this financial year. Banks are still a bit conservative in giving fresh funds. ECBs provide an additional avenue for raising funds,” said Chandrasekhar Ghosh, founder, Kolkata-based Bandhan.

According to MFIs, the interest for foreign loans would be at least three per cent less than that on domestic loans. For instance, MFIs get bank funds at close to 13 per cent., while in case a foreign loan, the total cost of ECBs, including absolute coupon rate and hedging, would be below 10 per cent.

“In the next financial year, we would look at raising ECB loans,” said Udai Kumar, managing director, Share.

Interestingly, many multilateral institutions and foreign private investors have dedicated funds for MFIs worldwide. However, in India, these were not allowed to take debt exposure, and hence, had to take equity in MFIs. Some were taking the non-convertible debenture route, through which the debt instrument would be listed on stock exchanges and then sold to a foreign investor for funding Indian MFIs. With the new RBI regulation, foreign social investors can take direct debt exposure in MFIs.

“Now that the rupee has stabilised at the current level, raising ECBs would carry a lower risk for foreign currency loans. In fact, multilateral institutions unable to invest in the MFI sector through the debt route would now be able to do so,” said Alok Prasad, chief executive, Microfinance Institutions Network.

In September, IFC, the private investment arm of the World Bank, had invested Rs 135 crore through equity in Bandhan.