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The microfinance institution (MFI) sector should explore new investment channels to reduce the overall cost of funds by developing partnerships with private donors such as foundations, non-government organisations, development agencies, venture capital, and social-impact investment through corporate social responsibility funds, among others, according to a joint report prepared by SIDBI and PwC India.

Currently, microlenders majorly depend on commercial banks for debt and equity funding. In FY19, Non-banking Finance Company-MFIs (NBFC-MFIs) received a total of ₹35,759 crore in debt funding from banks and other financial institutions. This is a 63 per cent increase from the debt funding of ₹21,967 crore in FY18.

The SIDBI-PwC India knowledge report said that while large MFIs source around 69 per cent of their debt from banks, medium and small-sized MFIs source a majority of their debt funding from other financial institutions.

CSR funds unspent

The report noted that in FY18, ₹1,717 crore of the CSR funds of NSE-listed companies were left unspent. The microfinance industry can develop partnerships with private corporations to channel unused CSR funds for enablement of the industry, the report suggested. It opined that regulated platforms for these partnerships will help in improved channelling of funds. The report recommended that the retail bond market can also be leveraged by microfinance players for long-term benefits.

Funds from the retail bond market can be utilised for the setting up of financial training institutes and creating kiosks for women’s development to help assist the microfinance industry.

The report underscored that the creation of funds, in line with India Microfinance Equity Fund (IMEF), will create an investment corpus for microlenders.

Microlenders can easily access the funds and encourage the onset of an entrepreneurial mindset and culture and upskilling of existing labour, thereby contributing to the country’s overall economic growth.

Additionally, alternative investments are expected to develop strong network effects to channel more private/public investors in the microlending industry, thus providing the much-needed impetus for growth.

The report said microlenders could explore new-generation fund-raising options such as social-impact bonds (SIBs) to access low-cost funds. Institutions with access to low-cost funds may consider channelling these funds to micro-borrowers through well-regulated intermediaries such as the Prayaas initiative by SIDBI.

New business models

The need to conserve capital for lowering the dependence on external funding has led to the emergence of new business models for smaller MFIs.

These smaller MFIs, while lending on their own books, are aggressively evaluating business correspondent (BC) models to source on behalf of larger banks and NBFCs, which would limit the risks of raising capital for them, the report said.

The smaller MFIs generate fee-based revenue through sourcing of loans for larger banks.

In return, they forgo interest-based revenue that could have been generated by sourcing their own loan, which comes with its own risk of overborrowing and NPAs.

According to the report, microlenders need to evaluate their risk appetite and need for funds and wisely choose the business model that would help in ensuring sustainability.

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