The Small Industries Development Bank of India (SIDBI) plans to extend approximately $5.8 million to some of India’s microfinance institutions (MFI), which have faced barriers in obtaining commercial on-lending funds since the 2010-11 microfinance crisis. While larger MFIs such as SKS Microfinance have been able to obtain such funds, smaller institutions have struggled to do so. SIDBI’s support, however, will enable these smaller MFIs to leverage the debt capital by five to six times and put them in a better position to raise further capital from overseas lenders and investors. The funds from SIDBI are offered for a seven to eight year period at an 8% interest rate and MFIs will have a three to four year moratorium period on their principal payments.

KOLKATA: The state-run Small Industries Development Bank of India or Sidbi has committed 30% of its Rs 100-crore microfinance development fund to some of the country’s poorest microfinance companies, which are yet to get significant commercial funding post the liquidity crisis of 2010-11.

MFIs, especially the smaller ones, operate in the country’s interiors and provide a veritable financial link to the poorest sections of the population, which are not yet covered by the banking system.

Sidbi’s support will offer a fresh lease of life to these smaller MFIs and allow them to leverage the capital fiveto-six times and raise resources from banks or overseas investors with less hassles. While lenders have opened their purse strings for bigger MFIs like Bandhan Financial Services and SKS Microfinance, bank loans remained largely inaccessible to the smaller ones, resulting in skewed growth of the sector.

The development financial institution has sanctioned eight proposals worth Rs30 crore and the disbursement is likely in a month’s time. It will pick direct equities in NBFC-MFIs and offer subordinated debt to Section 25 MFIs.

“We are very happy and enthusiastic,” said Mukul Jaiswal, managing director at Varanasi-based Cashfor Micro Credit, one of the likely recipients of Sidbi’s capital. “We will be able to raise at least five times the loans from banks as they will be more comfortable now to lend to us,” he said.

Cashfor has an outstanding portfolio of Rs 300 crore and is likely to receive Rs5 crore from Sidbi. West Bengal’s Society for Model Gram Bikash Kendra and Assam’s RGVN-Credit & Savings Program are also likely to receive fresh capital.

MFIs lend to the poor at a maximum 26% annual rate. Sidbi’s Rs100-crore dedicated fund was created by the government for investing in smaller MFIs to help them overcome the liquidity crisis of 2011 and grow in a regulated environment.

Sidbi will offer the debt for seven years and charge 8% interest rate a year on subordinated debt, with a clause that if any MFI converts itself into an NBFC in between, the debt may be converted into equities. The recipients will also enjoy a three-four year moratorium on principal payment.

http://articles.economictimes.indiatimes.com/2012-03-27/news/31245234_1_nbfc-mfis-microfinance-companies-bandhan-financial-services