MFIs an attractive option for NBFCs looking at banking foray: Eric Savage

Written by Patrick Fisher February 22, 2012 0 comment

Interview with Co-Founder & President Unitus Capital

Raghuvir Badrinath / Chennai Feb 20, 2012, 00:29 IST

The microfinance sector in India grew at an astonishing pace and so has been the climb down. The past 18-months have been one of the toughest time for microfinance institutions (MFI) as the access to capital has been scarce. The awaited Bill on microfinance is widely expected to bring solace to the sector. However, according to Unitus Capital, an established player in raising capital for MFIs, positive change is already happening in the country. Eric Savage, Co-Founder & President of Unitus Capital tells Raghuvir Badrinath that while there will be no sea change in how banks view the MFI sector, there will be at least one less hurdle to cross. Edited excerpts:

Everyone is waiting with baited breath about when and how the proposed Microfinance Bill will be passed. How do you think it will change the way how MFIs raise resources, which is the most critical aspect now?
While the funding from banks for MFIs has been much slower than normal during the past 15 months, it has recovered over the past six months as the regulatory situation improved. We are working with more than fifty different banks and most of them have made some loans to MFIs recently. There are a number of banks who are relatively negative and waiting for the Bill. MFIs are now perceived not to have that positive halo which was there two years ago and the pending regulation is another excuse for delaying. What the Bill will make obvious the current reality that there is already a proper governing body in place and that another Andhra Pradesh-like situation will not be tolerated. This will remove the last excuse for avoiding sanctioning credits to MFIs.

While that aspect relating to debt will be more or less addressed, what are the concerns for MFIs on the equity side?

It is not that bad, as many investors realise that the AP crisis has caused valuations reduce significantly. This has facilitated a very attractive buying opportunity… We continue to see equity investor interest albeit somewhat cautious.. During the past 12 months there have been a handful of notable equity deals. An aspect which is heartening is that many global funds are increasingly looking at India microfinance sector for investment. CVC, FMO from Denmark, Shorecap, IFC, Danish Microfinance Partners, Caspian, Elevar, Lok, Wolfensohn Capital Advisors and BlueOrchard are some of the investors who have taken advantage of the current opportunity to invest at this attractive time in high quality MFIs such as Janalakshmi, Satin, Arman, Bandhan, Utkarsh and Ujjivan. Over the next 12 months, I would expect there will be close to Rs 500 crore equity infusion into MFIs, in addition to the Rs 400 crore fund raise SKS Microfinance has announced. Certainly, it would be great if Indian HNIs also start to look at this sector actively to make an impact on poverty and take advantage of the present investment opportunity.

Given the context that both the engines – debt and equity – will start kicking in shortly, how do you think MFIs should build on this hope?
MFIs traditionally have been focusing on credit and its time they innovate further. Insurance, pension products, remittances and savings should be creatively worked on and more such initiatives should be prioritised. Some products as assistance for health and crop insurance, gold loans, education loans, livestock loans and housing loan as well can be made more popular instead of a plain vanilla group loan product.

Having built up the mass and scale, how do you think MFI sector will consolidate going further?
We expect that private equity investors will get their exits primarily through sales of their stakes to other PE funds or sales of the companies to other financial services companies. Mergers with other MFIs are likely to be muted in the near term as there are many strong personalities that make potential mergers challenging. The identity of the promoter is tied to the organisation. What we anticipate is that some of the MFIs are ideal targets for large NBFCs which are interested in banking licenses as RBI guidelines stress financial inclusion as one of the key parameters while granting the licences as and when that happens.