Last week a group of microfinance practitioners and investors gathered in New York City at the 2nd Microfinance Summit to discuss recent developments within the microfinance industry, as well as opportunities in providing healthcare, clean water, and renewable energy to low-income populations. Panelists discussed topics such as the prospect of MFI mergers in some regions and industry consolidation, the importance of foreign exchange hedging & risk management by MFIs and foreign investors, and the role that government & development finance institutions have played the past 18 months as many MFIs required timely refinancing.
When discussing evolutionary steps within the industry, Michael Hokenson of Minlam Asset Management, a fund providing local currency debt to MFIs, referenced IFMR Capital’s recent multi-originator securitisation of micro-loans into tradable securities (Mosec I), as a promising advancement toward a secondary market for microfinance assets.
During a panel on the state of private equity (PE) in microfinance, panelists posited that when considering the microfinance landscape for equity investment, “there is India, and then there’s the rest of the world.” What the panelists alluded to is that India’s microfinance opportunity is relatively unique and makes it a highly attractive investment destination for a combination of reasons. The potential size of the Indian microfinance market (“demand for microfinance”), in addition to access to large pools of educated professionals, a robust public equity market, and a banking sector compelled to lend to MFIs via priority sector lending (“capacity” and “supply”), makes for a highly attractive opportunity. And it is largely these ingredients that have compelled investors to give Indian MFIs valuations that seem relatively high versus international peers.
Bhakti Mirchandani of Unitus Capital, the Bangalore-based financial advisor to MFIs, did point out that even though Indian MFIs continue to receive relatively high price-to-book value multiples, on a price-to-earnings basis Indian MFIs are being valued in-line with their international peers. (To read more about MFI equity valuation and pricing, see this in-depth analysis by Nitin Chaudhary of IFMR Rural Finance and Suyash Rai of IFMR Advocacy Unit.)
As with any discussion of India’s microfinance opportunities, the topic of multiple-borrowing and other risks came up in more than one panel. The self-regulatory steps taken by Indian MFIs, such as the establishment of a credit bureau serving the microfinance industry, named Alpha, is one sign of how MFIs are reacting to the risks of over-lending in select regions of the country. (More on the topic of “Microfinance Credit Bubbles and Self-Regulation” available over at Microfinance Focus.)
The presentation below was delivered during a panel entitled, “Innovative Solutions for New Financing,” in order to highlight some of the structured finance techniques IFMR Capital is utilising to allow MFIs to tap domestic debt markets in an orderly and efficient manner. Participants were also given an intro to ATMNE’s commodity trading and financing pilot program in Kadi, Gujarat.
Following the presentation, Nancy Barry, former President of Women’s World Banking, noted that the securitisation transactions described are particularly encouraging because they point to the development of local, domestic capital markets with the capacity to fund the growth of its own microfinance sector over the long term. (Likely a prerequisite if India’s 100+ million unbanked households are to be reached in a timely manner.) There are certainly benefits to having access to international funding sources as well, but the ability for Indian MFIs to fund their operations by tapping into a variety of domestic investors (mutual funds, treasury desks at banks, a guarantee company such as IFMR Capital), allows MFIs to avoid currency risks, capital flight in times of international crisis, and other risks derived from depending disproportionately upon international financing.
Emboldened by the lessons from the recent financial crisis and encouraged by its early successes, IFMR Capital is continuing to work to ensure that its partner MFIs will have efficient and reliable access to debt capital, while seeking to grow its model to reach more MFIs and eventually other high-quality asset originators serving low-income households.
Peter Bremberg of IFMR Capital contributed to this post.