Braving regulatory uncertainties, private equity (PE) deals almost doubled in the microfinance sector in India in 2011, with development finance institutions (DFIs) fuelling the growth. So much so that India has attracted the second-highest volume of capital flows in the sector after Peru in 2011.
Last year, the global microfinance PE market witnessed the largest ever capital flow at $292 million (Rs 1,635 crore on Wednesday), compared with $205 million in 2010, a rise of 43 per cent, according to a recent report on global microfinance and equity, prepared jointly by the Consultative Group to Assist the Poor (CGAP) and J P Morgan.
Despite a crisis in the microfinance sector in the state, Andhra Pradesh had 19 deals closed and priced, amounting to $88 million last year, compared with 10 deals worth $45 million in 2010, the report said. About 92 per cent of investments in Asia were in India, while almost 74 per cent of the volume of transaction was on account of DFIs.
“There has been a lot of interest in the MFI (microfinance institution) space outside Andhra Pradesh. Over the next six months, one could expect deals worth Rs 300 crore to close,” said Abhijit Ray, co-founder of financial services firm Unitus Capital.
Some of the biggest deals of 2011 included the Rs 135-crore capital infusion from the International Finance Corp (IFC), the private investment arm of the World Bank, into the West Bengal-based micro lender, Bandhan Financial Services.
Ujjivan Financial Services and Equitas Holdings are in the process of raising $10 million and $20 million, respectively, as equity capital from IFC.
In February, Ujjivan raised Rs 127 crore from its existing investors--a Dutch PE fund Netherlands Development Finance Co and Mauritius-based WCP Mauritius Holdings III.
Similarly, in June 2011, micro lender Janalakshmi Financial Services raised Rs 65 crore from London-based Citi Venture Capital International.
“Overall, the PE market has been sluggish after the crisis in Andhra Pradesh, but development finance institutions have been active in picking up equity,” said Samit Ghosh, founder of Ujjivan.
The MFI sector had been bleeding since October 2010, when the Andhra Pradesh government had issued an ordinance that curbed fresh lending and recovery of loans in the state. The impact translated into bad loans worth as much as Rs 6,000-crore of toxic assets which might wipe out the net worth of several big Andhra Pradesh-based MFIs. Since then, the PE investors in top MFIs, mostly based in Andhra Pradesh, had been scouting for an exit route. However, the crisis diverted PE investments to MFIs outside the state.
Notably, in 2010, not only India, but several other countries also faced crises in the MFI sector due to over-indebtedness and regulatory clamp-down. Towards the end of 2010, the asset quality of many MFIs began to recover from a crisis of client over-indebtedness and unsustainable growth, particularly in India, Bosnia, and Nicaragua, the CGAP report said.
“While asset quality improved and transaction volumes increased, equity valuations continued to decline in 2011 from their peak in 2010, reversing the multiple expansion that had taken place until then. This is likely due to lingering uncertainties about asset quality in some markets and continued public scrutiny,” the report said.