MICROCAPITAL BRIEF: Commercial Banks, Private Equity Investors Reevaluate India’s Microfinance Sector in Light of Draft Microfinance Bill

Since the Indian government released a draft microfinance bill in July 2011, commercial banks and private equity investors reportedly have expressed a new willingness to consider investing in microfinance institutions (MFIs). The proposed bill would make India’s central banking authority, the Reserve Bank of India, the sole regulator of the microfinance sector. MFIs would be required to register with RBI, submit periodic financial reports and adhere to strict standards of client protection [1].

Indian Overseas Bank (IOB), a commercial bank, is reportedly looking to expand its loan book as a number of MFIs have experienced an improvement in portfolio quality and an increase in loan recoveries, including past IOB investment recipients SKS Microfinance and Bandhan Financial Services Private Limited. S N Mishra, general manager for corporate lending at IOB, was quoted as saying the “risk factors have eased” and the bank is now ready to consider disbursing new loans to MFIs, although the sizes of any such loans have not been disclosed [2].

Meanwhile, India’s Business Standard reports that investors are ready to inject as much as INR 6 billion (USD 130 million) into the microfinance sector over the next six months. The International Finance Corporation (IFC), the private-investment arm of the World Bank Group is purportedly close to approving an investment of INR 1.35 billion (USD 29 million) in Bandhan, which is based in the Indian state of West Bengal. And Unitus Capital, a Bangalore-based private equity firm, reportedly is working on microfinance investment deals with a combined value of INR 2 billion (USD 43 million) with five undisclosed institutions [3].

MicroCapital has recently covered a number of transactions in the Indian microfinance sector, including a qualified institutional placement by SKS, capital fundraising by Bhartiya Samruddhi Finance Limited (BSFL) and venture capital investment in Janalakshmi Financial Services (JFS) [4,5,6].

By Rohan Trivedi, Research Associate

About Indian Overseas Bank (IOB):
Indian Overseas Bank (IOB) was founded in 1937 to specialize in foreign exchange business and overseas banking. IOB is listed on the Bombay Stock Exchange. As of March 31, 2011, IOB reported total assets equivalent to USD 38 billion.

About SKS Microfinance:
SKS Microfinance is a microfinance institution (MFI) that was launched in 1998 and delivers microfinance products through a group-lending model to impoverished women in India. It is a for-profit, non-banking finance company that converted to a public limited company in May 2009 and launched an initial public offering on July 28, 2010. Equity investors include Quantum Hedge Fund, Sequoia Capital, Vinod Khosla, Small Industries Development Bank of India, Bajaj Allianz, Yatish Trading, Kismet Capital, Sandstone Capital, Silicon Valley Bank and Unitus. As of March 31, 2011, SKS reported to the US-based nonprofit data provider Microfinance Information Exchange (MIX) total assets of USD 952 million, a gross loan portfolio of USD 925 million, return on assets (ROA) of 2.4 percent, return on equity (ROE) of 7.93 percent and approximately 6.2 million borrowers.

About Bandhan Financial Services Private Limited:
Bandhan Financial Services Private Limited is a microfinance institution (MFI) based in Kolkata, India, that was founded in 2002. As of 2011, it operates approximately 1,550 branches in 18 states in India. It offers microenterprise loans as well as loans for individuals to pay for health emergencies. As of 2010, Bandhan Financial Services reported to the US-based nonprofit Microfinance Information Exchange (MIX) total assets of USD 614 million, a gross loan portfolio of USD 565 million, approximately 3.2 million borrowers, return on assets (ROA) of 5.32 percent and return on equity (ROE) of 41.1 percent.

About International Finance Corporation (IFC):
A member of the World Bank Group, the International Finance Corporation (IFC) offers loans, equity investments, advisory services and technical assistance to private companies with the intent of alleviating poverty and promoting open and competitive markets in developing countries. As of 2011, IFC has 182 member countries that drive its policies and approve disbursements. As of June 30, 2010, IFC reports net income of USD 1.75 billion, total assets of USD 61 billion, return on assets of 3.1 percent and total investment mobilization of USD 18.4 billion to 528 projects.

About Unitus Capital:
An affiliate of Unitus Labs, a US-based nonprofit, Unitus Capital is a financial advisory firm that specializes in arranging capital for microfinance institutions (MFIs) and other enterprises that aim to benefit the poor. Based in Bangalore, India, Unitus Capital offers financial advisory and capital markets services to clients in Asia. Between 2004 and 2010, Unitus Capital reports having arranged USD 25 million in debt capital for microfinance institutions (MFIs).

About Bhartiya Samruddhi Finance Limited (BSFL):
Bhartiya Samruddhi Finance Limited (BSFL) is a regulated non-banking finance company (NBFC) based in Hyderabad, India, that was founded in 1997. It is part of the BASIX Group, which provides microfinance, agricultural and business development services to poor, rural households. As of March 31, 2011, BSFL reported to the US-based nonprofit Microfinance Information Exchange (MIX) total assets of USD 352 million, a gross loan portfolio of USD 281 million, return on assets (ROA) of 0.66 percent, return on equity (ROE) of 4.73 percent and 1.72 million active borrowers as of March 31, 2011.

About Janalakshmi Financial Services (JFS):
Janalakshmi Financial Services (JFS) is a microfinance institution (MFI) located in India. It is focused primarily on offering loans, savings and microinsurance in urban areas. As of March 31, 2010, JFS reported to the US-based nonprofit Microfinance Information Exchange (MIX) total assets of USD 25.5 million, a gross loan portfolio of USD 14.9 million, 82,000 active borrowers, return on assets (ROA) of -3.05 percent and return on equity (ROE) of -8.74 percent.

Sources and Additional Resources:

[1] MicroCapital.org story, August 14, 2011: “MICROCAPITAL BRIEF: Indian Government Publishes Draft of Microfinance Institutions Bill, Would Make Reserve Bank of India (RBI) Sole Regulator, Establish Microfinance Development Council, Microfinance Development Fund”, https://www.microcapital.org/microcapital-brief-indian-government-publishes-draft-of-microfinance-institutions-bill-would-make-reserve-bank-of-india-rbi-sole-regulator-establish-microfinance-development-council-microfinance/

[2] MoneyControl.com: “Indian Overseas Bank set to resume MFI lending”, http://www.moneycontrol.com/news/business/indian-overseas-bank-set-to-resume-mfi-lending_572771.html

[3] Business Standard: “New rule may bring back private equity to (MFI)”, http://www.business-standard.com/india/news/new-rule-may-bring-back-private-equity-to-mfi/444726/

[4] MicroCapital.org story, August 1, 2011: “MICROCAPITAL BRIEF: Indian microfinance Institution SKS Reports Quarterly Loss, Looks to Raise $200m Through Private Placements”, https://www.microcapital.org/microcapital-brief-indian-microfinance-institution-sks-reports-quarterly-loss-looks-to-raise-200m-through-private-placements/

[5] MicroCapital.org story, August 9, 2011: “MICROCAPITAL BRIEF: Indian Microfinance Institution Bhartiya Samruddhi Finance Limited (BSFL) Raises $150m from Institutional Investors, Commercial Banks”, https://www.microcapital.org/microcapital-brief-indian-microfinance-institution-bhartiya-samruddhi-finance-limited-bsfl-raises-150m-from-institutional-investors-commercial-banks/

[6] MicroCapital.org story, June 25, 2011: “MICROCAPITAL BRIEF: Indian Microfinance Institution (MFI) Janalakshmi Financial Services (JFS) Raises 14m in Equity Led by Citi Venture Capital International (CVCI), https://www.microcapital.org/microcapital-brief-indian-microfinance-institution-mfi-janalakshmi-raises-14m-in-equity-led-by-citi-venture-capital-international-cvci/

MicroCapital Universe Profile: Indian Overseas Bank (IOB), https://www.microcapital.org/microfinanceuniverse/tiki-index.php?page=Indian+Overseas+Bank+%28IOB%29

MicroCapital Universe Profile: SKS Microfinance, https://www.microcapital.org/microfinanceuniverse/tiki-index.php?page=SKS+Microfinance

MicroCapital Universe Profile: Bandhan Financial Services Private Limited, https://www.microcapital.org/microfinanceuniverse/tiki-index.php?page=Bandhan+Financial+Services+Private+Limited

MicroCapital Universe Profile: International Finance Corporation (IFC), https://www.microcapital.org/microfinanceuniverse/tiki-index.php?page=International+Finance+Corporation+%28IFC%29

MicroCapital Universe Profile: Unitus Capital, https://www.microcapital.org/microfinanceuniverse/tiki-index.php?page=Unitus+Capital

MicroCapital Universe Profile: Bhartiya Samruddhi Finance Limited (BSFL), https://www.microcapital.org/microfinanceuniverse/tiki-index.php?page=Bhartiya+Samruddhi+Finance+Ltd+%28BSFL%29

MicroCapital Universe Profile: Janalakshmi Financial Services (JFS), https://www.microcapital.org/microfinanceuniverse/tiki-index.php?page=Janalakshmi+Financial+Services+%28JFS%29

Browse the MicroCapital Universe and add your entry to the wiki at https://www.microcapital.org/microfinanceuniverse/

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