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Microfinance institutions get a boost from development funds

MUMBAI: We are here to write big cheques. We do not write small sums," said Rajat Sood, vice-president, General Atlantic, a PE fund, in a message to the microfinanceindustry that's attempting to limp back to life after the SKS MicrofinanceBSE -0.05 % fiasco nearly killed the fledgling industry. Sood was speaking at a seminar arranged by industry body Microfinance Institutions Network (MFIN). Investors are showing some interest these days after fleeing the sector en masse.

But with 'magic money' — inflated valuation of a listed company — vanishing it is only small and serious investors and not those bulge bracket private firms, such as
Sequoia, which are interested. 

Large PE funds have a minimum investment threshold limit of $25-50 million while development and social funds look at small
investments of $5 million. Post the order by the Andhra Pradesh government restricting microfinance institutions (MFIs) from indulging in unfair lending and recovery practices, investors started shunning this sector as this order marked the end of high returns to MFIs. 

After the SKS Microfinance fiasco, major funds may have shunned the sector but smaller funds are coming forward to invest.

Private equity investors invested $168 million (close to Rs 10,000 crore at current value) in this sector in FY13, according to data released by MFIN. These investors typically look for high returns on exit. But a more careful look at the investors' list indicates that most of the money is being invested by multilateral and governmentsupported funds like SIDBI and IFC. 

Last year, the MFI industry saw the return of equity investors into the sector after a slump in the previous couple of years. Investments came mainly from funds like
International Finance Corporation (World Bank investment arm), ShoreCap, Avishkar, SIDBI and Lok Capital. SIDBI is mandated to play a developmental role with realistic return expectations. 

Generally, private equity funds look at a return of anywhere between 20-25% over a period of 5-7 years. The 
development funds, on the other hand, look at a moderate return of 10-12% over a longer term of 10 years. In the pre-crisis era, PEs had made five times to seven times return from their investments in the sector. 

"Today, DFIs and social funds are investing into the MFI sector," said Alok Prasad, CEO, MFIN. "Unlike pure private equity funds, they have a developmental mandate and seek moderate returns over the medium term. The current framework of regulations and, more particularly, margin caps have led to a significant drop in return expectation. This coupled with certain political risks have resulted in PE showing less interest in MFIs." 

SIDBI has committed Rs 104 crore to this sector, up from the Rs 200 crore it received from the government for this sector. Most of the money is going to MFIs in underserved states according to SIDBI officials. "We are helping small and medium-sized MFIs so that they can earn 10 -12% returns and be profitable," said Sushil Munhot, chairman and managing director, SIDBI. 

In August 2012, RBI had imposed a margin cap of 10-12%, depending on the size of the MFIs. Post the change, large ones can charge 22% while smaller ones can charge 24%, if the interest charged by banks is 10%. Before the regulations were put in place, MFIs were charging as high as 40%. 

The sky-high returns from the microfinance industry are history and so is the interest of the so-called venture investors and seed capital providers.