NextBillion - An Initiative of the William Davidson Institute at the University of Michigan

Thursday, June 11, 2015

MUMBAI: Mutual funds have started investing in debt issuances of microfinance companies after a five-year hiatus. The lure of higher yields, top-grade ratings and shorter tenure of loans are prompting fund houses to park funds in microfinance securities.

Investments worth over Rs 1,000 crore have already flown into microfinance papers bearing 11.5-13% coupon rates. HDFC MF, SBI MF, Reliance Mutual, Kotak MF, and ICICI Pru MF, among others, have invested in papers issued by SKS Microfinance, Janalakshmi Financial Services, Ujjivan Financial Services and Equitas Micro Finance. All these papers yield 3-4% higher than top-rated securities issued by companies.

“It’s an opportunistic view on the sector. These papers give us very attractive spreads and are much more than the best of corporate debt,” said Lakshmi Iyer, head of fixed income and products at Kotak Mutual Fund.

Mutual funds had stopped investing in microfinance companies after the blowup in Andhra Pradesh in 2010, when several borrowers committed suicide due to alleged harassment by lenders. This crisis led to promulgation of various laws to control and regulate the scope of microfinance in the country.