Puneet Gupta is restless and visibly excited. The last ten days have been the culmination of many days’ efforts in creating access to finance to deserving high quality Microfinance Institutions (MFIs). IFMR Mezzanine Finance Private Limited (IFMR Mezz), a part of the IFMR Trust eco-system, which is headed by Puneet, has just disbursed an amount of Rs. 10 million to Patna based Saija Finance Private Limited (“Saija”), an investment that had enough reasons to celebrate.
“We are thrilled!” says a beaming Jayshree Venkatesan, who heads the origination team at IFMR Mezz. What makes this investment special; we are tempted to ask her. “Well, a lot of things actually” she replies. “This investment marks our entry into the microfinance sector. We have been working hard for a while now on the structure and we have built one so unique that we are the first company to specialise in mezzanine financing for the microfinance structure anywhere in India.”
Quasi equity funds
What could be unique about an investment in an MFI? “The funds were infused in the form of unsecured, sub-ordinated debt over a period of 7.5 years, with quarterly interest payments and a bullet principal repayment at the very end. The subordinated debt will qualify as Tier II capital or quasi equity for Saija”, Puneet explains.
In the absence of easy access to debt capital, NBFC-MFIs have historically preferred equity investments by diluting their stake at an early stage. However, this is an option that is available only to a few large MFIs in the sector. Smaller MFIs, either due to their size, vintage or legal structure, are unable to attract equity investments, which severely impairs growth or results in over-leverage of their existing equity. IFMR Mezz aims to provide quasi equity that addresses this gap and allows for growth without dilution of equity stakes.
Rigorous Due Diligence
Of course, it was not a cake walk for Saija, which had to go through a rigorous due-diligence process. The investment was preceded by a multi-staged scrutiny process. IFMR Mezz has a pre-due diligence check list that had to be satisfactory before proceeding further. Saija’s documents were in order and the secondary data checks were positive. Next, IFMR Mezz dispatched a team to scrutinize the quality of operations on-site to remote districts of Patna and Arrah in Bihar. “We would follow the same stringent due-diligence process for all our future investments as well” says Suman Saurabh, who was part of the due-diligence team. “The investment committee of IFMR Mezz then bases its decision on the report that we prepare and if the committee finds it satisfactory, the funds are sanctioned.”
Sample this to understand the intensity of the due-diligence – over fifteen MFIs were considered for a subordinate loan, of which only one-third qualified for an on-site inspection by IFMR Mezz. Saija was the fourth MFI to be visited by IFMR Mezz and yet is the first investment to be completed.
Net cost of funds
The intense scrutiny of the processes is not for nothing as the MFI has a lot to gain for once the investment is made. Mezzanine financing ensures that the growth of the MFI is not affected due to lack of funds and that too without diluting the stakes of the promoter. It also ensures that the net cost of funds raised through this route is lower than from equity sources. For instance, if Saija is able to leverage IFMR Mezzanine’s infusion of funds up to 5 times, the effective cost of funds for the transaction increases by merely 150 basis points over cost of debt.
“What this means to us is that it not only shows that our systems are strong but also that we can now be more confident about the future when we raise more funds” says an upbeat Mr. Sinha, the promoter of Saija. “This takes away a lot of pressure and allows me to focus on the growth of the company. Now that this is taken care of, come April next year, I will completely focus on delivering new products like insurance and other products to our clients” he adds.
With the microfinance sector recently running into turbulent times, complaints of an unjustified liquidity tightening in the system have been doing the rounds. But IFMR Mezz chose this very circumstance to reinforce its commitment to the microfinance sector. A new partner in growth has arrived indeed.
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