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Private equity funds to buy stake in Janalakshmi Financial Services for Rs 350 crore

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Sabarinath M & ARCHANA RAI, ET Bureau Aug 8, 2013, 04.53AM IST

MUMBAI/BANGALORE: A consortium of private equity(PE) funds including Tata Capital’s PE fund and Morgan Stanley Global Private Equity will pick up a significant minority stake in urban microlenderJanalakshmi Financial Services for close to Rs 350 crore, signalling confidence in the long-term potential of the microfinance industry after being shattered by the financial crisis in Andhra Pradesh.
The infusion of fourth round of funding comes at a time when former Citi banker Ramesh Ramanathan-promoted non-banking finance company has applied for a licence from Reserve Bank of India to transform itself into a bank.

Morgan Stanley PE declined to comment. “Unfortunately, Tata Capital is not in a position to respond at this point of time,” said Arun Nanda, managing director, Rediffusion, the public relations agency for Tata group. ”No Comments,” said Ramesh Ramanathan.

“This is clearly a reflection of the opportunities that are unfolding in the micro finance industry. Local banks are better equipped to do doorstep service to customers than big banks,” said Vishwavir Ahuja, MD and CEO Ratnakar Bank. ”Doorstep banking is really needed for financial inclusion. Hence, better-run micro finance institutions will get the status of bank and ‘local area bank’ concept will get revived.”

The Bangalore-based non banking finance company had last raised Rs 80 crore from two global funds GAWA Microfinance Fund and India Financial Inclusion Fund (IFIF). Vallabh Bhansali, the co-founder of brokerage Enam Securities, is also an investor in the company.

Janalakshmi, which offers service to 5000,000 customers across 47 cities, is also among the most well capitalised microfinance institutions in India, raised over Rs 250 crore over the past few years from marquee investors including Citi Ventures and Singapore-based hedge fund Treeline Asia Master Fund.

Ramanathan, a managing graduate from Yale University, rose to managing director and European head of corporate derivatives before returning to India in 1998 with his wife Swati. The couple, with interests in urban governance and planning, pooled resources to set up Janaagraha, an urban civic advocacy group that remains central to a diverse portfolio that now includes for-profit ventures in affordable housing and urban microfinance. Today, he is known as the co-founder of urban civic movement Janaagraha and NBFC Janalakshmi.

In line with his social entrepreneur objective, Janalakshmi has been designed in a two tier structure: for-profit operating companies for investors; and a not-for-profit holding company called Janalakshmi Social Services in which promoter stakes are held. Funds in Janalakshmi Social Services can only be used to address social issues.

A spate of global private equity funds have recently invested in Indian microfinance firms, indicating strong growth potential for the microfinance industry. KKR had recently invested Rs 440 crore in NBFC Magma Fincorp which is rapidly expanding operations in semi urban and rural areas and IFC had invested in Ujjivan Financial Services.

Symbiotics 2013 MIV Survey Report: Market Data and Peer Group Analysis

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» Posted by  in Category: Investment Funds,Trends/Challenges at 8:42 am

Published by Symbiotics Research and Advisory; 2013; 31 pages; available at:http://www.microfinancegateway.org/p/site/m//template.rc/1.9.62223

Symbiotics SA has conducted the seventh annual survey of microfinance investment vehicles (MIVs) which draws on survey responses from 84 MIVs representing approximately 93 percent of the global MIV market asset base. This paper presents an analysis of the financial and social performance of the microfinance investment industry based on data from December 2012.

The first section of the survey provides key market trends and figures. The first trend that the paper reports is that the MIV market had a positive total asset growth for the third consecutive year, recording a 19 percent increase from 2011 to 2012. The market is concentrated, however, with 44 percent of the total assets owned by the top five MIVs, which also account for 41 percent of microfinance portfolios, while the next five account for 15 percent and 17 percent, respectively. The microfinance portfolio is also regionally concentrated, with the 72 percent of funds being invested in Latin America and Eastern Europe and Central Asia. Despite the regional concentration, MIVs are experiencing the fastest growth in regions such as the Middle East and North Africa, which recorded the highest percentage growth of 167 percent from 2011 to 2012 due to a low base in absolute terms. South Asia, although having the lowest percentage growth of MIVs at 15 percent, has rebounded from the negative growth it recorded in 2011. The average loan size of microfinance institutions (MFIs) increased from USD 1,797 to USD 2,069. The average MIV portfolio size is USD 73 million, of which 78 percent is directly invested in debt.

The second section of the survey provides benchmarks and peer group analysis. For the purpose of the analysis, the MIVs are segmented into peer groups: fixed income funds, mixed funds and equity funds. Out of the peer groups, equity funds exhibited the highest growth of 66 percent in 2012, compared to 19 percent for mixed funds and 16 percent for fixed income funds. Among MIVs that took part in the survey, 75 percent of the aggregate portfolio is invested in microfinance, 9 percent is in other portfolios including small and medium-sized enterprises (SMEs) and fair trade investments and the balance of 16 percent is in cash and other assets. The study identifies the geographical concentration of MIV investments by volume as a key trend, with 72 percent of microfinance investments taking place in Latin America and Eastern Europe and Central Asia (31 percent 41 percent respectively).

On the funding side, institutional investors make up 61 percent of the MIV funding. Public-sector institutions make up 21 percent of funding, retail investors contribute 10 percent and high net worth individuals account for the balance of 7 percent. Public-sector institutions direct the majority of their funds to fixed income funds, while retail investors support mixed funds and high net worth individuals invest most of their money in equity funds. Annual returns have rebounded in 2012, ending a period of decline since 2007. The Euro returns were recorded at 4.3 percent compared to 2.5 percent in 2011 and the US dollar returns were at 3.4 percent compared to 2.4 percent.

The paper concludes by reporting environmental, social and governance (ESG) standards of the MIVs. The number of funds endorsing the Smart Campaign Client Protection Principles, a set of standards that monitor the practices and ethics of microfinance businesses to protect clients from harm, increased from 96 percent to 97 percent in 2012. On the environmental side, 73 percent of MIVs integrated environmental issues such as carbon emissions, air pollution and community displacement in their investment decisions. The number of equity funds applying anti-corruption policies in their investments decreased from 93 percent to 81 percent. Lastly, equity funds had the lowest performance in terms of ESG practices, with only 75 percent reporting their ESG standards to investors, down from 86 percent in 2011.

By Meghan Gillis, Research Associate

About Symbiotics SA

Founded in 2005, Symbiotics provides for-profit investment intermediary services to the microfinance industry as well as business services to investors in and practitioners of micro- and small enterprise (MSE) development. Symbiotics works with approximately 27 investment funds (MIVs) and a dozen institutional investors. As of 2013 it has facilitated the provision of USD 1.5 billion in capital to about 500,000 micro-, small and medium-sized enterprises (MSMEs) through 125 financial institutions in approximately 45 emerging economies. The company also offers Syminvest, a microfinance investment intelligence platform designed to increase transparency and enhance investment capacity in the industry by monitoring regional markets and specific institutions.

About CGAP (Consultative Group to Assist the Poor):

CGAP (Consultative Group to Assist the Poor) is a nonprofit policy and research center dedicated to providing financial access for poor people worldwide. CGAP was established in 1995 by approximately thirty development agencies and private foundations and is housed at the World Bank in Washington, DC, USA. Its mission is to provide “market intelligence, promote standards, develop innovative solutions and offer advisory services to governments, financial service providers, donors, and investors.”

 

Indonesia’s Microfinance Industry Faces Overwhelming Demand

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BURUH KUASAI PABRIK

Many roadside stall operators in Indonesia have to resort to loans from mobile banks (bank keliling) as they are unable to obtain formal banking services. (JG Photo/Fajrin Raharjo)

 

A tattooed man briefly interrupted Wastiri as he ducked into her roadside stall, taking a seat alongside the slow-moving traffic that crawled down the narrow Tanjung Priok street. She flashed him a smile as he greeted her, beaming wide and toothless from her perch atop a worn wooden bench.

Colorful bags of instant noodles and potato chips lined the walls of Wastiri’s stall — a tiny plastic-covered shop sandwiched between a ramshackle noodle stand and a large commercial bank in North Jakarta’s roughhewn portside neighborhood.

For some 40 years this stall has been the source of Wastiri’s livelihood, she explained. In that time the woman, now more than 80, has become something of an institution. Customers call her “Emak” (Mother) as they stop by to ask what she has in stock, peering into her small store as they walk down the street.

The bank next door hasn’t been as reliable, she said.

“I would like to borrow from banks, as it is cheaper to do so, but their requirements are complicated,” she complained. “They ask me for an identification card [which I have], but I do not have a family card or the deed to my home for collateral. I don’t own the place.”

For Wastiri, and millions of other low-income Indonesians, the nation’s commercial banking system is a closed door. While lenders like Bank Rakyat Indonesia offer low-cost microloans, lending regulations — which require customers to have proof of a permanent job, income and collateral — shut out the majority of Indonesia’s laborers.

It’s a large segment of the domestic market. Despite Indonesia’s rising middle class, nearly half of the country’s households live at, or close to, the government’s $22-a-month poverty line, according to World Bank statistics. Some 92 percent of Indonesia’s workforce is employed in the informal sector. Most hold semi-permanent jobs but lack an employment contract.

Commercial lenders and microfinance cooperatives have tried to meet the demand, but a combination of strict regulations and too-high thresholds have hampered efforts and given rise to a murky black-market of motorcycle-riding lenders and unscrupulous loan sharks.

The lenders offer loans at high interest rates — nearly 20 percent higher than bank rates — and often collect daily payments from customers. The requirements are loose and the lenders are eager to approach customers, said Wastiri.

Bank keliling [mobile banks] are more suitable for us,” she said. “Thought they ask for daily or weekly payments, it is easier for us to borrow money from them — I personally don’t even have to give them my identification card.”

Experts have struggled to estimate the real size of the informal market, but from their best estimates it appears to be growing.

“We can expect to see an increase in the number of non-bank microfinance institutions because the non-bankable segment is huge and it is very difficult for the poor to access banks,” said Dewi Meisari, an expert in micro-, small- and medium- sized enterprises at the University of Indonesia (UI).

The Ministry of Micro, Small and Middle Enterprises recorded 55 million MSMEs in 2011 and reported a loan-to-GDP ratio of 33.1 percent in a survey a year later. Some two-thirds of the MSMEs in Indonesia have no access to formal banking services, the ministry found, warning that the lack of access was a threat to Indonesia’s economic growth.

“The lower income population has little or no options when they borrow money,” Dewi said.

Growth potential

Indonesia’s microfinance market can be lucrative if properly tapped, experts believe. MSMEs account for  57 percent of the nation’s gross domestic product, Bank Indonesia (BI) Deputy Governor Halim Alamsyah said during a seminar last June. While MSMEs have historically borrowed outside the formal market, the number of micro business owners receiving commercial loans has grown in the last year, Firman Moeis, head of commercial linkage at CIMB Niaga, added.

“The micro finance market in Indonesia has great potential for growth,” he said. Out of the 56 million MSME owners in Indonesia, only 37 percent of them receive micro banking services. [But] as of February 2013, the MSME industry had an outstanding loan value of Rp. 514.5 trillion — a 14.6 percent jump from last year’s numbers.”

Firman believes the nation’s economic growth is anchored by micro businesses like Wastiri’s food stall. During the Asian economic crisis, the owners of small and mirco businesses emerged unscathed, he said.

“The 1998 crisis negatively impacted big companies, but small-medium businesses thrived,” Firman explained. Today, the economic downturn isn’t as drastic; furthermore, the small-medium businesses are fundamentally sound, so I am certain this situation will leave little or no impact on the microfinance industry.”

While large companies saw their balance sheets reverse into the red, the nation’s informal sector — cigarette sellers, stall owners and street food cart operators — continued to earn a living, said Leonardus Kamilius, founder of Koperasi Kasih Indonesia, a microfinance institution operating in Cilincing, North Jakarta.

“In the 1998 crisis, the companies that were battered by the crisis were the big companies who owed US dollars. For small enterprises, their economies are not as related to the global economy and hence, they are more resilient,” he told the Jakarta Globe.

Financial literacy still a problem

For Said Hendro, access to microloans has been both a blessing and a curse. It’s tempting to borrow too much, he said, adding that many of his friends found themselves neck-deep in debt after taking money from both microfinance cooperatives and mobile banks.

“Many of my friends around here have gone back to their villages as their businesses have gone bankrupt,” Said shared. “They borrow from all these mobile banks and they can’t repay their debt.

“I understand their predicament completely because these people come by everyday offering loans and it is hard to say no. Even though I have loans from both official cooperatives and the mobile banks, I am still tempted to borrow more.”

Experts warn that the lack of financial literacy among low-income residents could undermine out any gains made by offering poor people access to financial services. Borrowers need access to both commercial loans and education for Indonesia’s microcredit industry to make a positive impact, experts said.

“Most people in the low-income population cannot comprehend the whole notion of interest rates — the way the process of borrowing is explained to them is by telling them how much they need to pay in installments per week,” Dewi explained.

Leonardus echoed Dewi’s sentiment.

“People who can afford loans of 5 million rupiah and above, they generally already know how to manage their money and do not require further financial education,” he said. “However, for smaller loans like 500,000 rupiah loans for a banana fritter [pisang goreng] seller, he does not know how to manage his money and will benefit greatly from financial education.”