Big names in banking are now getting into small loan business. While banks like ICICI Bank and Citi have always been meeting fund requirements of big corporates, the focus now is shifting towards the remote corners of the country.
In a first-of-its-kind venture, Washington-based Grameen Foundation and Chennai-based IFMR Trust announced the launch of Grameen Capital India (GCI) on Monday. Grameen Foundation is promoted by Mohammed Yunus' Grameen Bank.
Grameen Capital has a total capital base of Rs 5 crore and intends to offer fee-based investment banking (I-banking) services to microfinance institutions (MFIs) in India. It would also help local and global investors identify the right kind of MFIs in which they could invest, depending on their risk profiles.
This could bring in a wide range of investors into the microfinance industry. In the domestic market, potential investors could include commercial banks, insurance companies, pension funds, etc. On a global scale, there are several commercial investors like private equity, venture capital and even socially-responsible funds are interested in investing in this sector, apart from non-resident Indians (NRIs).
While Grameen Foundation and the IFMR Trust have a 43% stake in the company, Citicorp Finance owns the balance 14% stake. The focus would largely be on MFIs, based in north-eastern states and the central Indian belt, considering that bulk of the larger MFIs and self-help group (SHGs) networks are extremely concentrated in southern states, said Grameen Capital India CEO Royston Braganza.
Mr Braganza pointed out that while the total demand for funds could be as high as $50 billion in the domestic microfinance space, the current availability is only around $5 billion. GCI plans to offer MFIs an opportunity to access low-cost funds through capital advisory services. As of now, many such entities are heavily dependent on banks to raise funds.
For instance, it has been observed that MFIs based in the north-east and central parts of India find the cost of raising funds much more than South-based institutions.
The company plans to offer MFIs a wide range of solutions, including pooling and securitisation of assets, loan syndications, hitting the equity market with public offers, etc through an active interaction with rating agencies, on one hand, and investors, on the other.
One critical issue in the local microfinance industry is that there are several fragmented MFIs located in far-flung areas, which makes it imperative to have an aggregation of these disaggregated portfolios.
Enhancing the quality of assets owned by MFIs also makes it economically viable for banks to invest in these papers, thus helping them meet their targets for priority sector lending. After playing the role of an arranger and creating the necessary linkages, GCI may also look at establishing a wholesale fund which caters to the microfinance sector in India.
A senior official from the microfinance industry pointed out that MFIs lack access to mainstream sources of finance. If they directly deal with an investor, they find it difficult to negotiate on the terms and conditions and often have to bow down to the investor's wishes. However, in such a situation, the presence of an intermediary could help improve matters.