Background to the Fund
The microfinance sector in India is one of the largest financial access movements in the world. The sector in India has been constrained by the lack of access to a diversified source of growth capital, especially with a medium to long term tenor, which in turn can be attributed in part, to a nascent finance market-place. The Fund identifies this market need as an opportunity to channel institutional domestic and offshore capital to the emerging asset class of Indian microfinance debt instruments.
Microfinance institutions in India reach out to more than 25 million borrowers. However, when compared to the number of unbanked population, the outreach is still small. As per the World Bank, only 35 per cent of the adult Indian population (defined as 15 years of age and above) has a formal bank account and only 8 per cent borrow form financial institutional sources. In this respect, the provision of growth capital in the microfinance sector can materially alter the level of financial inclusion in India. The progress towards financial inclusion has important implications for poverty alleviation given the positive externalities to provision of financial services.
An important aspect for the development of the Indian microfinance sector is the presence of a vibrant and mature bond market for microfinance institutions. However, the bond market in India for microfinance institutions is nascent. The total debt requirement of the sector is much higher and current bond issuances meet a very small proportion of the debt requirement of microfinance institutions. The issuance of Non-Convertible Debentures (NCDs) has increased in recent years, but is still small compared to bank funding.
The Fund’s asset allocation and instrument mix will be pivotal in filling important gaps in the type of funding available to microfinance institutions. The current domestic sources of funding are heavily skewed towards secured short term funding. The provisioning of longer term secured and subordinated debt will enable the microfinance institutions to invest in both growing their loan portfolio as well as information systems, training, branch expansion and fixed assets.
The Fund also seeks to develop a mature debt capital market for microfinance institutions in India by diversifying the sources of funds. Microfinance institutions in India are primarily dependent on bank funding for their on-lending operations. However, there is increased realization to diversify the sources of funding as a risk mitigating strategy. The opening of a new line of funding will be a significant step in supplementing the bank and other funding to the microfinance sector.
The broad objective/purpose of the Fund is to promote financial inclusion in India by facilitating development of the Indian microfinance sector. The Fund seeks to achieve this by investing in various securities/instruments of microfinance institutions and its underlying assets.
The Fund shall invest primarily in Social Ventures. The investment strategy of the Fund is provided as follows:
• Investing in a mix of debt – Providing long term growth capital in the form of mezzanine debt, medium to long term senior secured debt, and other permissible securities in accordance with the Regulations which will fill the existing gap in the capital structure of Indian microfinance institutions.
• Alternate source of domestic funding – The Fund seeks to enable diversification by way of both funding sources and type of funding for Indian microfinance institutions.
• Access to bond market – The Fund will help in the development of bond markets for Indian microfinance institutions.
IFMR Trust is a private trust set up with a mission to ensure that every individual and every enterprise has complete access to financial services. Companies promoted by IFMR Trust form the IFMR Group, and as a part of the mission to promote financial inclusion, have played an important role in providing access to funding towards the development of the Indian microfinance sector.
IFMR Group’s work in the Indian microfinance sector provides the Investment Manager with a strategic outlook on the sector and the Fund has been conceived based on this outlook.
The IFMR Group has been a pioneer in capital market innovations, having been associated with the first ever listing of a securitised paper on the Bombay Stock Exchange. IFMR Group generally invests in securitisation transaction, typically taking positions that are subordinated to senior investors, which receives repayments only after the senior investors are fully paid out.
In addition to participating in the securitisation transactions, IFMR Group companies have also taken balance sheet exposures on several microfinance institutions in the form of term loans, working capital lines and guarantees.
IFMR Group also provides a complete range of financial services through a unique branch based business model called the Kshetriya Gramin Financial Services (KGFS). A KGFS (KGFS transliterates to Regional Rural Financial Services) is a local financial institution offering financial products & services in a specific geographic area catering to all the financial needs of the local population. It follows a customer centric model wherein financial products and services are offered through the unique ‘Wealth Management Approach’. IFMR Group has promoted access to financial products through the KGFS Model.
The Investment Manager will seek to use the collective knowledge and the expertise of the IFMR Group in the microfinance sector.
Back to Home