Finance minister Pranab Mukherjee, in his budget speech last week, threw the country’s troubled microfinance sector a long-awaited lifeline. Mukherjee said that the Micro Finance Institutions (Development and Regulation) Bill, 2012, would be tabled in the current session of Parliament — download the draft bill. If passed, it could play a critical role in bringing growth capital back to the sector.
In the past 17 months, microfinance institutions (MFI) have found themselves abandoned by equity capital, chiefly from venture capital and private equity investors, as the sector reeled from what is now commonly known as the Andhra Pradesh crisis. Barring developmental finance institutions and a few social venture capital investors, MFIs have been unable to access the equity capital that once fuelled the sector’s meteoric growth.
The draft bill proposes to make it compulsory for all micro finance institutions to be registered with the Reserve Bank of India, which would be in charge of governing the sector. Importantly, it is designed to bring MFIs under a central law, which the industry hopes will override state laws such as the Andhra Pradesh Microfinance (Regulation of Moneylending) Act, which dragged the industry into its current crisis beginning October 2010.
The Andhra Pradesh law restricts MFIs active in the state from collecting payments on loans on a weekly basis and bars them from issuing loans to borrowers with pending loans. The law (which followed an ordinance) was provoked by a spate of borrower suicides in the state on account of alleged coercive loan collection methods used by MFIs. Given that nearly one-third of the estimated Rs 30,000 crore MFI market in India was concentrated in Andhra Pradesh at the time, most MFIs quickly slipped into losses. These included BSE-listed SKS Microfinance and Bhartiya Samrudhi Finance (Basix), the country’s oldest MFI.
Follow the link to a white paper on the Andhra Pradesh crisis and its impact on borrowers, released recently by social sector investor Legatum Ventures. The infographic above was released as part of the white paper.
The situation seems to have improved in the first three months of 2012. While conventional venture capital investors are yet to re-embrace the sector, banks have made a comeback of sorts with term loans and securitization deals, a new MFI debt fund is on the cards and social venture capitalists have closed a couple of deals. See key transactions listed below:
- February 1: SIDBI issues a Rs 100 crore term loan to SKS Microfinance.
- February 1: Ujjivan Financial Services raises Rs 127.9 crore ($25.5 million) as part of its fifth round of equity funding from Dutch developmental finance institution FMO and Wolfensohn Capital Partners.
- February 5: Online peer-to-peer microlending platform Milaap Social Ventures raises an undisclosed amount as seed funding from Unitus Seed Fund.
- February 28: SKS Microfinance and Bandhan Financial Services announce securitization deals worth Rs 354 crore and Rs 500 crore respectively. This was SKS’ eighth such deal since the AP crisis erupted.
- March 7: International Finance Corporation announces a $100 million debt fund, dubbed Microfinance for Asia Debt Fund (MIFA), that will invest in India, Indonesia, Pakistan and Philippines.
- March 20: Basix receives the go-ahead for a debt restructuring package that will see a consortium of banks convert Rs 500 crore worth loans into equity. The repayment of an additional Rs 200 crore in loans has been deferred and spread over seven years.
- March 24: SKS closed yet another securitization deal worth Rs 321 crore with four banks.
Securitization transactions allow MFIs to clear their balance sheets by selling their loan receivables and attached risks to banks. More such transactions are expected to close in the next few months, signaling that the worst may be over for the microfinance sector. The passing of the draft MFI Bill would be the icing on the cake.
However, for the still-nascent sector to really get back its growth momentum, equity capital would be critical. With bad loans gradually moving off the books through securitization deals, MFIs can start approaching venture capital and private equity investors again for fresh capital. Several have also, since the Andhra Pradesh crisis, tweaked their business models to diversify both their target markets and businesses. BSE-listed SKS Microfinance, for instance, announced plans to diversify into gold loans and retail services last year. The move came soon after the company’s founder Vikram Akula exited the company over speculated differences with the senior leadership team.
How soon venture capital and private equity investors re-enter the sector, though, remains a big question. Since January last year, MFIs have seen a smattering of venture capital deals, chiefly driven by firms such as Aavishkaar and Acumen Fund that focus on the bottom-of-the-pyramid (see chart above). Conventional investors, whose exit return valuations have gone haywire following the crisis, are waiting for clarity on the laws that govern such companies.
The ongoing Budget session ends on May 22, including a two-week break coming up between March 31 and April 23. If the MFI Bill doesn’t make it through this session, it could reverse the small gains made by the sector in the past three months. We’ll know soon enough.
Image Courtesy: Legatum Ventures