Microfinance Firm Gets Fresh Round of Funding –

Written by Patrick Fisher June 22, 2011 0 comment


BANGALORE — In what could be pegged as a revival of investor interest in firms offering credit to the poor, micro-lender Janalakshmi Financial Services Pvt. Ltd. has raised 650 million rupees ($14.67 million) in its third round of funding from private equity firms.

“Coming after a major crisis in the sector, this is a major transaction and is a clear sign that the tide is turning for microfinance,” said Ramesh Ramanathan, chairman of Janalakshmi, which lends to the urban poor.

The number of deals involving microfinance companies has fallen this year although the quantum has remained almost the same. In the first half of 2010, seven investments worth $75 million were made in microfinance companies; so far this year, only four investments worth $69 million have been made, according to Venture Intelligence, a data provider.

Once a favourite with investors, the Indian microfinance sector has run into trouble after Andhra Pradesh introduced stringent regulations last year in response to allegations that microfinance institutions were charging usurious rates of interest, lending indiscriminately and, in the process, even driving some borrowers to suicide. There have been mass defaults in the state since then. Bankers have also withdrawn credit lines to such lenders, sending the microfinance sector into a deep crisis in its biggest market.

Private equity firm Citi Venture Capital International was the lead investor in the Janalakshmi deal. Existing investors such as Bellwether Microfinance Fund, Lok Capital, Tree Line Asia Master Fund (Singapore) Pte Ltd., and Michael and Susan Dell Foundation have participated as well. Bangalore-based Unitus Capital was an adviser on the deal.

With the latest round, Janalaksmi has raised more than one billion rupees from investors in the past three years. It intends to use the proceeds for business development, including more disbursements.

“The fund-raising was not easy,” Mr. Ramanathan said. “It was a very difficult process. There are two main concerns that I would say investors have: Is there a clear ecosystem to operate in? What is a company’s business model?”

“This is quite an extraordinary quantum of funds being raised by a microfinance company, particularly in the context of the microfinance crisis,” said Vineet Rai, founder and chief executive of Aavishkaar Venture Management Services Pvt. Ltd., one of the biggest investors in micro-finance institutions in India. The firm is looking at closing two more investments in microfinance companies in a month’s time.

“This has to be seen as a vote of consent from investors for financial inclusion,” he said.

Mr. Rai, however, cautioned that the deal does not indicate that microfinance companies are completely out of the financing tangle as yet.

“I think investors will still wait for another six to nine months to see how things pan out,” he said.