Download sector_report1.pdf - Microfinance and Development ...

Despite the
weaknesses the
public sector
often displays
as an equity
investor
(excessive
caution and
sometimes redtape),
these are
not inherent,
and are more
often than not
offset by the
ability to bear
higher risk
Interestingly, and reassuringly, an earlier M-CRIL study based on nearly 250 MFIs rated since
June 2005, found that extremely small MFIs with portfolios of less than 50 lakh had the
highest CARs of all size classes - usually on account of accumulated donor grants (M-CRIL
2005). Unfortunately these were being eroded by operating losses, a useful reminder that the
main priority in assisting small and indeed most medium MFIs should be capacity building.
However the fact that they have positive net worth makes the challenge of investing in them
easier, accompanied by heavy doses of CB.
Despite the weaknesses the public sector often displays as an equity investor (excessive
caution and sometimes red-tape), these are not inherent and are more often than not offset
by the ability to bear higher risk. It is true that at a time when the availability of equity
financing was more of a constraint than it is now, SFMC did not find many takers for its equity
offering, which took the form of cumulative redeemable preferable shares, and which were
really quasi-equity or Tier II capital, of insufficient interest to most of the partners it was
offered to. On the other hand its long term transformation loan, also a form of quasi-equity as
subordinated debt, helped many partners in their transformation plans. 11
MFDEF has shown similar risk-aversion (or at least bureaucratic delay) in formulating its guidelines
(these are still interim) but has now started receiving and considering applications (of which
is has received three). Appropriately, it is planning to limit the amount of investment per
partner to Rs 2 crore for NBFCs, and Rs 1 crore for others, and to give preference mostly to
MFIs in underserved states. For NGO-MFIs, whose structure does not provide for shareholder
equity, MFDEF is planning to extend quasi-equity in the form of nine-year loans at 1 per cent,
with a moratorium of two years.
The "double-bottom line"
The situation in
India is a little
more
encouraging.
Whatever their
place on the
commercialsocial
continuum,
there is strong
demand for the
services of all
the existing
VCFs whether
they focus
primarily on
investments
with attractive
returns or not
A recent worldwide survey of foreign investment funds concluded that the average fund was
too constrained in its ability to take risk 12 to add much value to the market, which was
overcrowded. Very few of the funds were prepared "to finance less well-established MFIs,
accept higher risk, spend greater amounts on pre-investment research and deliver funding in
smaller packages" (CGAP 2005). The situation in India is a little more encouraging. Whatever
their place on the commercial-social continuum, there is strong demand for the services of all
the existing VCFs whether they focus primarily on investments with attractive returns or not.
This is because they all have in addition social goals (and therefore a "double bottom line"),
and offer valuable CB inputs, whether through their own resources or by arrangement with
institutions that have access to grant funding. Interestingly, in India, unlike the situation
worldwide, most of the VC funding comes from private rather than public sources 13 and it is
individuals and not public institutional investors who are behind the funds with the largest
endowments of socially-motivated capital. Also, all the VCFs bear the foreign exchange risk
themselves rather than pushing it on to the investee. Finally they are investing despite the
lack of clear exit options. 14
The demand for equity
The longer-term demand for equity has been discussed above. The strong current demand for
equity comes from the spurt in NBFC start-ups, and from buy-outs of old pre-1999 NBFCs,
especially in the urban areas. It also comes from a number of existing pre-1999 NBFCs, 15
128