SKS Goes in for a Third Round

Spandana’s neighbor down the street and competitor/ fellow lender to the poor (will explore this interesting relationship further in a future post,) SKS, has announced the largest equity financing round yet in Indian Microfinance. The deal- amounting to 147 crores (~37.5 million USD) while significant, will likely only be a brief tied over until a further equity infusion is required.

A peculiarity of Indian Microfinance is at play here. The regulating body for MFI’s, the Reserve Bank of India (RBI, India’s Central Bank) does not allow MFI’s like SKS and Spandana to take savings deposits. These deposits generally form a significant portion of the funds banks use for lending. In the absence of these funds Indian MFI’s rely on external debt (most commonly loans from banks) for the funds to lend to borrowers. Sorry, that was kind of a mouthful.

The RBI, like all central banks, has strict caps on the amount of such debt a MFI can take relative to its capital base. If they want to take on additional debt (to expand operations) they must take additional equity. Given the incredibly ambitious expansion goals most Indian MFI’s have, these equity rounds will be having with increasing frequency. Doing some quick math SKS will probably require additional equity toward the end of 2008.

So what are MFI’s doing with all this money? There is no shortage of ideas, expansion into China is one- more on this tomorrow.