Private equity (PE) investors are alarmed by the Andhra Pradesh government’s move to bar micro finance institutions (MFIs) from tapping the capital market and PE investments.
They have said this was regressive thinking and would stifle such lending.
The AP government recommended to the Malegam committee on the subject, set up the Reserve Bank of India, that MFIs be barred from making Initial Public Offers of stock. They would then, said the government, focus on profits and defeat the purpose of microfinance.
Following the news, SKS Microfinance’s share price fell by nine per cent on the Bombay Stock Exchange. It is the only listed MFI in the country. Other large MFIs like Spandana Sphoorty and Share Microfinance were looking to list on the bourses. Experts say they’d now defer their plans. AP forms a large proportion of MFI lending in the country.
“The AP government’s move is regressive. If MFIs don’t raise equity they cannot leverage their business. It will be impossible for them to survive,” said Ascent Capital Director Ajay Mittal.
“Many people said it was a sunrise industry but their very existence has come under question. The size of the industry has grown to a level that regulation has become imminent. Now, private equity firms will shy away from investing in MFIs with any cap,” said Jagannadham Thunuguntla of SMC Capitals.
Sequoia Capital’s managing director, Sumir Chadha, feels there should be balanced regulation. “We would like to see balanced regulation that does not choke the industry.”
“The state government has no say in allowing MFIs to list. The market regulator has no reason to stop an entity like an MFI from tapping the public market,” said a PE fund executive who did not wish to be named.
Another executive said on the condition of anonymity: “The state government’s moves are politically motivated. Self-Help Gropups are competing with MFIs in the state. Since MFIs have done well, they are trying to crack down on MFIs.”
MFIs borrow funds at 13-14 per cent, while their operational cost comes to around 8 per cent. “They raise debt at a high rate and so they cannot afford to lend at 22-23 per cent. They will try to make some profit out of the business, at least 3-4 per cent,” said a senior executive of a PE firm.