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

Wednesday, July 29, 2015

Several mutual funds based in India, including Industrial Credit and Investment Corporation of India (ICICI) Prudential Mutual Fund, Housing Development Finance Corporation (HDFC) Mutual Fund, Kotak Mutual Fund, Reliance Mutual Fund and State Bank of India (SBI) Mutual Fund, recently invested in secured debentures issued by several Indian microfinance institutions (MFIs). The issuers include Equitas Microfinance (Equitas); Janalakshmi Financial Services (JFS); SKS Microfinance (SKS) and Ujjivan Financial Services (Ujjivan). Although the individual transaction amounts are not available, the investments by the mutual funds total approximately INR 10 billion (USD 157 million). The debentures bear coupon rates of 11.5 up to 13 percent, approximately 3 to 4 percent above than highly rated securities issued by other Indian companies. The securities are backed by receivables and fixed assets owned by the MFIs.

The above-mentioned mutual funds had stopped investing in MFIs after the 2010 downturn in the state of Andhra Pradesh, when microcredit repayment rates dropped substantially and several borrowers committed suicide “due to alleged harassment by lenders”[1]. This crisis led the Reserve Bank of India, the authority regulating MFIs in the country, changing several Microfinance regulations.

Navneet Munot, the chief investment officer at SBI Mutual Fund, said that “microfinance, as a sector, has become more amenable to investments post the Andhra Pradesh crisis. Lots of regulatory controls have been put in place… the sector is very stable for investments now. We expect the sector to do well in the years to come”[1].

As of March 2014, Equitas reported total assets of USD 288 million, a gross loan portfolio of USD 250.3 million, 1.8 million active borrowers, return on assets of 3.66 percent and return on equity of 19.54 percent. As of December 2014, JFS reported total assets of USD 420 million, a gross loan portfolio of USD 342 million, 1.4 million active borrowers, return on assets of 2.94 percent and return on equity of 13.42 percent. As of March 2015, SKS reported total assets of 754 million, a gross loan portfolio of USD 671 million and approximately 5.1 million borrowers. As of March 2014, SKS reported return on assets of 2.88 percent and return on equity of 16.52 percent. As of March 2014, Ujjivan reported total assets of USD 343.4 million, a gross loan portfolio of USD 269.3 million, return on assets of 3.50 percent, return on equity of 15.66 percent and 1.3 million active borrowers. None of the four MFIs accept deposits