Nascent Indian MFIs and their Fund Raising Challenges

This Focus Note provides insights into the different sources of capital available to nascent MFIs in India. It discusses ways in which an MFI might improve its ability to attract such capital.

MFIs finance their funding needs through a combination of external debt, equity financing and internal cash generation. MFIs in India often start as NGOs, funding operations with grants and concessional loans from donors and development finance institutions. As the MFI matures, private debt financing becomes available. Subsequently, traditional equity financing becomes an option.

Currently, availability of grant funds and concessional loans is limited. Nascent Indian MFIs are dependent on borrowed funds from commercial sources. To improve their access to finance, MFIs can:

• Maintain high quality portfolios;
• Prepare a robust and realistic business plan;
• Build a strong board and robust systems;
• Provide full transparency in business operations and performance;
• Build relationships with more than one bank;
• Consider a change in legal status to non-banking financial company ;
• Sell portfolio to banks;
• Pursue unconventional options such as loan guarantees and subordinated debt.