The Indian central bank has eased the norms for local microfinance institutions (MFIs) – so that these may raise funds through overseas borrowings. On the face of it, the move is positive for the MFI sector which is, otherwise, beset with regulatory issues and a largely ambivalent domestic fundraising environment. But the quantum of money that an MFI can scoop up outside India is too paltry to make much of a difference for the large players.
To begin with, a section of the MFIs is already allowed to get overseas loans. Microfinance institutions categorised as NGOs are allowed to borrow up to $5 million (Rs 26.5 crore) from abroad within the span of a financial year.
So what has actually changed?
The overseas borrowing ceiling for NGOs into MFI business has been raised to $10 million. But such MFIs reportedly account for just about one-tenth of the overall microfinance lending. Hence, the bigger regulatory easing has come as the Reserve Bank of India will now allow all MFIs to raise funds up to $10 million (Rs 53 crore) from abroad under the external commercial borrowing (ECB) route.
Therefore, the move allows MFIs to raise cheaper overseas loans as a source of money to lend within India. Surely there is a currency risk that they need to watch out for, given the swing in rupee-dollar rates over the past few months. But the new norms have the proviso that the forex exposure of the borrower is to be fully hedged.
But here are some details still pointing that you may find the devil in the fine print.
Eligibility: Entities engaged in microfinance activities will be free to access the ECB window provided they are registered under the Societies Registration Act, 1860; registered under the Indian Trust Act, 1882; registered either under the conventional state-level co-operative acts, the national level multi-state co-operative legislation or under the new state-level mutually aided co-operative acts (MACS Act), but is not a co-operative bank; NBFC categorised as ‘Non-Banking Financial Company-Micro Finance Institutions’ (NBFC-MFIs), besides companies registered under Section 25 of the Companies Act, 1956, and involved in microfinance activity.
If an MFI has structured its legal entity outside these categories, it will not be free to go for ECB.
Borrowing relationship and status: MFIs registered as societies, trusts and co-operatives, and engaged in microfinance should have a satisfactory borrowing relationship for at least three years with a scheduled commercial bank authorised to deal in foreign exchange and would require a certificate of due diligence on ‘fit and proper’ status of the board/committee of the management of the borrowing entity from the designated authorised dealer (AD) bank.
Lenders: The new norms also have some riders as to who can be courted for overseas borrowing. For one, ECB funds should be routed through normal banking channels. NBFC-MFIs have been permitted to avail of ECBs from multilateral institutions, such as IFC, ADB, etc., besides regional financial institutions, international banks and foreign equity holders and overseas organisations.
Companies registered under Section 25 of the Companies Act and engaged in microfinance will be permitted to avail of ECBs from international banks, multilateral financial institutions, export credit agencies, foreign equity holders, overseas organisations and individuals.
Other MFIs will be permitted to avail of ECBs from international banks, multilateral financial institutions, export credit agencies, overseas organisations and individuals.
There are also some pointers under which ‘overseas organisations’ and ‘individuals’ may be covered under these ECB norms. For the more detailed provisos, one can check here.
Net-net, the ECB window does open a new vista for raising cheaper fund and easing liquidity pressure for small and mid-size MFIs. The RBI has taken a cautious approach in opening the ECB tap by keeping the ceiling fixed at $10 million with what it states as “view to ensure minimisation of systemic risk” during a financial year.
But the catch here is the ‘financial year.’ A large MFI can potentially scoop up $10 million in March and another $10 million in April and meet its immediate fund requirement. Given that the new norms are immediately effective, this is possible.
On the other hand, barring a few large MFIs like SKS Microfinance, others are small and this ECB route comes as a critical source of cheap funds. Incidentally, SKS Microfinance, the largest listed player in the sector, has initiated a process to raise Rs 900 crore, of which it expects to raise a little over half by March through a qualified institutional placement.
Although MFIs have been facing rough weather in terms of domestic fundraising as regulatory screws in the key Andhra Pradesh market have affected business, there have been a slew of small and mid-sized fundraising deals in the sector this year.
In the most recent deal, Ahmedabad-based microfinance firm Arman Financial Services Ltd said that it would be raising Rs 15 crore ($3 million) in private equity funding from Belgian investment firm Incofin Investment Management’s Rural Impulse Fund II. In other deals, Varanasi-based Utkarsh Micro Finance Pvt Ltd received Rs 25 crore in series B funding, led by Norwegian Microfinance Initiative; Bangalore-based Ujjivan Financial Services Pvt Ltd said that it would be raising over Rs 100 crore in debt funding from SIDBI besides other public/private sector banks and Bandhan Financial Services Pvt Ltd raised Rs 135 crore from IFC.