Micro finance companies’ overseas borrowing doubled to $80 million in H1FY20

Domestic microfinance companies are the latest among Indian corporates to tap overseas borrowings. The External commercial borrowings (ECB) of India’s microfinance institutions grew more than 100 per cent on a year-on-year basis in the first half of the current fiscal year.

Data compiled from Reserve Bank of India (RBI) statistics show that non-banking financial company–micro finance institutions (NBFC-MFIs) collectively raised ECBs worth $80 million in the April-September period. The borrowing stood around $39 million for the same period last year. In the subsequent half-yearly period (October-March) MFIs borrowed only $14 million using this route.

The reason

Heightened risk aversion and liquidity concerns in the domestic market counterbalanced by lower borrowing costs and excess liquidity conditions abroad have made ECBs more lucrative for domestic borrowers.

“NBFC MFIs were largely meeting their requirements through banks and NBFCs domestically as well as via the FPI route from offshore investors. Funding from other NBFCs to MFIs has reduced, given their own liquidity constraints and focus on core business,” said Samir Shah, Executive Vice-Chair & Group President, Dvara Trust.

Although ECBs are gaining traction among large and well-rated NBFC MFIs, they currently account for only a small portion of the industry’s overall borrowing. Bank credit continues to be the major chunk of debt funding for NBFC MFIs, accounting for 64 per cent of their borrowing in FY19 while NBFCs contributed the remaining 36 per cent. Banks’ lending to MFIs qualifies for priority sector lending (PSL) requirements.

Small MFIs struggling

While large and mid-sized MFIs continue to enjoy bank credit as well as other sources of borrowing such as ECBs and securitisation, small MFIs, which are solely dependent on NBFCs, have faced the heat of the liquidity crisis ever since the IL&FS crisis broke out in September 2018.

“Mainstream ECB investors are unlikely to fund any but the very large NBFCs, if at all, especially given the heightened risk environment at this time,” Dvara Trust’s Shah said.

However, industry experts feel the increase in overseas borrowing of NBFC MFIs is more of a borrowing mix and volume of ECBs at the current level are insignificant when compared to the size of their domestic bank borrowing.

“The increase in borrowing (ECBs) is entirely because of large and well-rated MFIs because they are growing fast and expanding their lending and growing along with the industry, which itself is growing at a rate of 30 per cent on a year-on-year basis. ECBs are only a small portion when compared to tens of thousands of crores that the industry borrows from banks,” said Harsh Shrivastava, CEO, Microfinance Institutions Network (MFIN), an RBI recognized self-regulatory organisation and industry association of the microfinance industry in India.

According to Micrometer, a quarterly report published by MFIN, the microfinance industry witnessed 42.9 per cent growth in Q1FY20 with a total loan portfolio (GLP) of ₹1,90,684 crore as on June 30. NBFC-MFIs were the second largest provider of micro-credit with a loan outstanding of ₹57,601 crore, accounting for 30.2 per cent of the total industry portfolio. Banks hold the largest share of portfolio in micro-credit with total loan outstanding of ₹78,060 crore, which is 40.9 per cent of the total microcredit universe.

MFIs in India are poised to grow at 40-45 per cent in FY20, according to Brickwork Ratings. “Reeling under the shock of demonetisation in FY17, the AUM growth slowed to 20 per cent from 35 per cent in FY16. The growth rebounded in FY18 and the growth momentum continued in FY19 and is expected to sustain the healthy growth in FY20 as well backed by availability of credit, expectation of reduced interest rates and disciplined collection and recovery model,” the rating agency wrote in a recent research report.

Borrowing mix

Although ECBs do not form a significant portion of NBFC-MFIs’ overall borrowing pie, they have no doubt emerged as a stable source of alternate funding, particularly for the longer maturity period.

“Our business is growing at 30-40 per cent, which needs the same amount of growth in funding also. Through ECBs we are able to diversify our funding sources and also able to get long term funding,” said Udaya Kumar Hebbar, Managing Director & CEO, Credit Access Grameen Limited.

“In the long term we would like to have 40-50 per cent of our overall borrowing from international sources,” Hebbar added.