The instrument in the form of a subordinated debt, which will be available to MFIs, will qualify as quasi-equity or Tier 2 capital and repayment will be over an eight-year term.
Small Industries Development Bank of India (Sidbi), the apex bank for small and medium enterprises, is in the process of extending a mix of equity and subordinated debt for the first time to any micro finance institutions (MFIs) in the country.
The bank will be disbursing close to Rs 1,000 crore. It also proposes to raise borrowings close to Rs 10,000-15,000 crore from multilateral funding agencies apart from domestic debt.
The instrument in the form of a subordinated debt, which will be available to MFIs, will qualify as quasi-equity or Tier 2 capital and repayment will be over an eight-year term.
With a slightly higher rate than the base lending rate, the instrument would have a moratorium of 3-4 years and the MFI can start paying back after three years and also make bullet payments. This will help MFIs enhance their scalability and help them reach out to larger number of beneficiaries in the rural areas.
RM Malla, chairman and managing director, Sidbi on the sidelines of a micro finance seminar in Kolkata said, “MFIs will soon have to increase their capital adequacy ratio from 12% to 15% and hence there would be a need for equity support. Most of the MFI groups do not have industrial backup and to sustain growth, the need for higher equity becomes crucial.”
“We have created a corpus and committed Rs 500 crore already, out of which Rs 100 crore would comprise pure equity and the balance would be subordinated debt. There are 7-8 MFIs to whom we have committed pure equity. While pricing may become an issue in case of equity, as a national institution, we do not subscribe to any fancy price. When asked on the exit route in case of pure equity, Malla said, “We intend to be in for a long term of say 10 years.”
For example, Sidbi has already infused Rs 50 crore pure equity into Bandhan, one of the leading MFIs in India. The apex bank for microfinance will also put in Rs 50 crore as subordinated debt in the MFI.
Sidbi, at present, lends to 147 micro credit companies operating across the country with a total exposure going up to Rs 3,800 crore by the close of FY09. The total outstanding to beneficiaries in 2009-10 is around Rs 18,000-20,000 crore.
On its generation of fresh lines of credit in 2010-11, Malla said, “This year we will borrow $300 million (Rs 1,500 crore approx) from the World Bank, Rs $300 million from Japan International Co-operation Agency. We will also initiate talks with ADB and KfW.”
Earlier Chandra Sekhar Ghosh, founder and CEO, Bandhan, said that with the support of Sidbi, the microfinance sector has touched a phenomenal growth of 400%. He, however, added that the efforts in the eastern region are still lagging behind some of the others, where the penetration level is high, especially in south India.
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