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Microfinance entities in wave of loans abroad – Banking and Financial News
Domestic microfinance lenders are increasingly borrowing abroad, capitalizing on easing liquidity, attractive long-term lending rates and global investors’ growing interest in India’s microfinance sector.
Last week, Kochi-based Muthoot Microfinance said its $25 million fundraising through external commercial borrowings (ECB) with a greenshoe option was oversubscribed to $38 million by a series of foreign investors. This follows an initial fundraising of $75 million in March. In total, the company raised $113 million (around Rs 950 million) in ECBs, closing the issue well before the end-of-June maturity date.
ECBs are funds borrowed by Indian entities from foreign sources, usually in the form of loans or debt instruments. These loans are subject to regulations established by the Reserve Bank of India (RBI) and are often used to access cheaper financing options and diversify financing sources.
Muthoot Microfinance is not alone. Delhi-based Fusion Microfinance secured $25 million (Rs 209 million) in ECB loans from US International DFC last month, while Chennai-based microfinance-focused Dvara KGFS raised nearly $40 million (around Rs 335 million) from global impact investors in the last six months.
Sadaf Sayeed, CEO of Muthoot Microfinance, sees the ECBs’ longer tenure and attractive interest rates as key advantages compared to domestic lending through banks or bond issuance. “ECBs have a minimum mandate of three years, while microfinance loans mainly last two years. Borrowing for 3 to 5 years helps improve asset and liability management for microfinance players,” Sayeed told FE.
Unlike bank loans, ECBs come with one-time repayment, which means the loan is repaid at the end of the tenure. This helps microfinance companies improve cash flow and use their collections to build their portfolios, as repayments are only made at the end of the loan term.
RBI data shows that ECB fundraising by microfinance entities increased fivefold from the previous year to a record $388 million (around Rs 3,500 crore) in FY24.
Balakrishna Kamath, Chief Financial Officer (CFO) of CreditAccess Grameenhighlighted the importance of a diversified financing profile to support credit opportunities in rural areas India. The Bengaluru-based institution raised $212 million in ECB, the highest amount among microfinance entities, in the previous fiscal year. He highlighted that the ECBs allow the diversification of financing sources and provide long-term financing.
However, ECBs still constitute a small part of the global loan portfolio, according to data from the Network of Microfinance Institutions. As of March 2024, the total outstanding loans of the microfinance sector stood at 1.11 billion rupees. Bank loans accounted for 61%, NBFCs 20%, All India Financial Institutions 10% and ECBs 6%, up from less than 1% in FY20.
Shilpa Bhatter, CFO, Dvara KGFS, highlighted that most foreign investors in the microfinance space are impact investors focused on financial inclusion, women’s empowerment, rural entrepreneurship and micro and small enterprise development. “Their goals are aligned with those of microfinance lenders, leading to a strong partnership,” she added.
She also noted that in some cases, domestic borrowing costs are 50-100 basis points higher than foreign borrowing costs, including coverage.
For example, Muthoot Microfinance raised $38 million with a maturity of three years and three months at a blended cost of 9.58%, benchmarked to a three-month Secured Overnight Financing Rate (SOFR) with a margin of 2.85 %.
“Unless you are a AAA-rated company, domestic DNT issuance costs about 10.5-11%, a difference of 100 basis points,” Sayeed said.