Fundraising via NCD route grips Indian microfinance sector

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By Naagesh Naaraayana

Microfinance Focus, Jan. 4, 2010: With more than Rs. 1,000 crore capital inflow into the microfinance sector in 2009, new avenues to raise funds have come under scrutiny of microfinance institutions to meet the demand for rapid expansion that the sector is witnessing in the last two years despite the global financial meltdown in the mainstream banking sector.

Led by SKS microfinance and Spandana Sphoorthy which have successfully raised funds via the non-convertible debentures (NCD) route, many MFIs will follow the suit. The NCDs, which can be issued to both retail and institutional investors, will be in the form of a loan to a company that cannot be converted into equity.

The country’s first ever listed MFI’s non- convertible debentures issue was by Hyderabad-based SKS Microfinance that had raised Rs 75 crore by one year NCD at a coupon rate of 10 per cent in May 2009. The NCDs are listed on the Bombay Stock Exchange (BSE) and have been placed with the Standard Chartered Bank’s Foreign Institutional Investments (FII). The company chose to raise funds through NCDs (debt) so that it could match its debt with the equity it raised a year before.

Similarly, in June, Spandana Sphoorty Financial Limited, another Hyderabad-based microfinance institution, had raised Rs 80 crore by issuing one-year non-convertible debentures (NCD) redeemable at a premium of 10 per cent. The NCDs have been subscribed by Standard Chartered Bank India and were listed on the Bombay Stock Exchange (BSE).

Already Tamil Nadu-based Grama Vidiyal Micro Finance Limited (GVMFL) has announced plans to raise Rs 100 crore through NCDs and carried out due diligence. Not far behind, many established microfinance institutions which have turned into non-banking financial institutions in recent years and have been enjoying good credit ratings are in the race to explore the possibility of fund-raising via the NCD route.

For investors, NCDs still remain good option given the Fixed Income scenario. Essentially, these NCDs are more attractive as the companies typically offer 2-4 per cent higher returns than the fixed deposits. Moreover, they attract no TDS on interest as they would be issued in a dematerialized form and listed as a security in the National Stock Exchange. They also allow flexible liquidity or a short-term tenor.

Essentially, the move helps MFIs diversify their fund base, as cost of funding from banks and other financial insitutions has increased to more than 10 percent. Moreover, NCDs are a viable option for MFIs as they believe that public offering of common shares is not a good option.
In current environment, many MFIs will not be able to price their common or preferential shares at higher valuations. At lower valuations they not only get less capital, but also have to forego a higher dilution.

However, there is a concern that the issue of NCDs lack transparency though companies offer several reasons for issuing them. Secure to some extent, the NCDs are still exposed to corporate risks which should not be left unnoticed.

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