Not A Micro Problem

<?xml version="1.0" encoding="UTF-8"?><root available-locales="en_US," default-locale="en_US"><static-content language-id="en_US"><![CDATA[<p>This week, Hyderabad-based Bhartiya Sammrudhi Finance (BFSL) sprung an ugly surprise on the country's already troubled microfinance sector. Founder and CEO Vijay Mahajan announced in a newspaper interview that without a fresh infusion of funds, India's oldest microfinance institution (MFI) could fold in less than three months. <br><br>At the core of the problem lies accumulated bad loans worth Rs 450 crore in Andhra Pradesh that the company has been unable to recover from borrowers. The reason for this, according to the company, is a state government enforced law in October that restricts MFIs from collecting money from borrowers on a weekly basis. <br><br>Mahajan is now in the market to raise over Rs 1,400 crore in equity and debt capital in an attempt to try and salvage the company.&nbsp; He's most likely to turn to private equity (PE) investors to bring in the equity component. PE investors have bankrolled MFIs for nearly a decade, pumping in $494.9 million (over Rs 2,000 crore approximately) between 2005 and now, according to Delhi-based financial research provider VCCEdge.<br><br><img src="/businessworld/system/files/1_3.jpg" style="float: right;" width="410" height="213">However, for PE investors, microfinance no longer holds the allure it did prior to the SKS Microfinance initial public offering (IPO) in August last year. Hyderabad-based SKS, currently the country's largest MFI, has been wracked by problems since the IPO and its share price has plunged from over Rs 1,000 per share last August to around Rs 430 now. Complaints against SKS' recovery practices led to a crackdown on MFIs active in Andhra Pradesh and subsequently the law that seems to have sounded the death knell for Basix.<br><br>If Basix does fold as Mahajan predicts, PE investors will have to worry about protecting their existing investments rather than make fresh ones. Basix itself has a posse of such investors including International Finance Corporation (IFC), Matrix Partners, Aavishkaar and Lok Capital. Mumbai-based Matrix is the most recent entrant in the company, leading a Rs 118 crore investment round in April 2010. The firm could not be reached for comments.<br><br><strong><a href="/businessworld/system/files/2_pu.gif" target="_blank">Click here to view graph 1</a></strong><br><br><a href="/businessworld/system/files/3_pu.gif" target="_blank"><strong>Click here to view graph 2<br><br></strong></a></p>