In search of funds, MFIs take to crowd sourcing
BV Mahalakshmi, Aug 26, 2011
After knocking on the doors of banks and private equity houses, micro finance institutions (MFIs) may soon tap the largely untapped potential in crowd sourcing, which is primarily a retail funding structure, to raise funds. Crowd sourcing in the micro finance sector is the mobilisation of capital from individuals by a collecting platform and passing it through a partner or channel to the end borrower. Crowd sourcing companies, some of which started mostly as NGOs, are trying to stay afloat and scale up faster to improve reach. In fact, Milaap, which is the first company in the country to get approval from the Reserve Bank of India for sourcing funds from the international market, is working through an NGO on the ground as a delivery partner. But, this is also an opportunity for companies like Mudhal or Rang De to develop different business models for crowd sourcing in smaller proportions at an initial phase. The flow of funding from overseas investors has considerably diminished over the past 10 months. However, as the industry stabilises and the regulatory and political risks are dealt with, a revival of investor interest can be expected. “The emerging regulatory framework for the MF sector requires that MFIs be well capitalised, well governed institutions with adequate capacity to sustain market shocks. Mergers of smaller MFIs will result in the formation of well capitalised, stable entities. Hence, both regulatory and market pressures may push the industry towards consolidation. For the borrowers, this can be a positive change since large, well governed and stable organisations can be expected to be more competitive, offering lower-priced products,’’ says Microfinance Institutions Network (MFIN) CEO Alok Prasad. “Crowd sourcing is a relatively new concept. At this point of time, it cannot be regarded as a meaningful source of funding for the MF industry. Nonetheless, over time, it does have the potential of emerging as an important retail funding structure.
Focused marketing coupled with the industry regaining its image as a stable and responsible provider of financial services to the poor are necessary conditions for crowd sourcing form of funding becoming significant,’’ says Alok Prasad. According to an Associated Chambers of Commerce and Industry of India (Assocham) report, the financial needs of the MFIs in the country is estimated to reach $200 billion in the long term. “Hence, new sources of financing are therefore essential and private investors will be certainly playing a key role in their growth”, says Assocham president Dilip Modi. The issues of alternative funding, reduction in operating costs, restricting indebtedness and income criteria need to be finetuned and supported for healthy and vibrant growth of MFIs. On the liquidity situation and capital flows, Basix chairman Vijay Mahajan, recently said: “In general, investor sentiment is pretty down. Private equity has pretty much walked away from this sector even though just a year ago they were very keen. The political risks have become so high that the underlying risk is unpredictable.” Despite the risks, the median operating expense ratio of 11.8% of Indian MFIs are amongst the most cost-efficient in the world and their interest rates are among the lowest. Recently, Small Industries Development Bank of India (SIDBI) also said that it has plans to disburse around Rs1,000 crore credit to MFIs during 2011-12, which is 19% more than the loaned amount last fiscal. The size of the microfinance industry in India is estimated to be about Rs 24,000 crore, of which Andhra Pradesh is estimated to account for almost a quarter with Rs 7,400 crore, according to Intellecap. Hence the industry is now talking about M&As. The recent merger proposal by Spandana, Share Micro Fin and Asmitha, targeting the poorest of the poor with a new business model, may help the companies’ businesses but not the final stakeholder. “M&A is simply a market response to changed markets. In the case of the MFI sector in India, it is also a response to the increased capital requirement for MFIs. There are a number of smaller MFIs that do not meet the proposed increased capital requirement and have little alternative other than to merge with others to survive. In the medium to long term, M&A should lead to scale, and scale should help the small borrower find less expensive loans, provided the mergers and acquisitions do not go so far as to reduce competition. It is a theoretical possibility.
However having said that, the current constraint on new investment in MFIs is not the lack of new models of fund raising or capital structuring, it is political and reputational risk’’ explains K Sree Kumar, CEO, Intellecap. There remains a commitment to improving financial inclusion among many private sector investors, so the sector will continue to see people investing in the sector, whether out of bravery or principle. They will drive harder deals, look for better terms, and seek lower valuations – all of which suggest that the sector could become more investor-driven rather than promoter-driven.