IPO-Bound Fusion Microfinance Plans Secured Loan Arm For SMEs

The IPO-bound Fusion Microfinance, which has been piloting a small business-focused secured lending book, is commercially launching it from next month as it seeks to fortify its secured portfolio and also drive faster growth.

Microfinance is typically small ticket loans, up to Rs 50,000 per borrower and is lent only to women through their self help groups and the loan is fully unsecured/without collaterals.

As against this, the New Delhi-based Fusion, backed by global private equity major Warburg Pincus and is the largest in terms of customer base and the second largest when it comes to loan book, wants to drive a secured business but only targeted at small businesses, which need not be run by women alone.

Fusion's Rs 1,100-crore initial share sale -- Rs 600 crore in fresh share sale and the rest via an offer-for-sale by promoter families and existing external investors -- is opening next Wednesday at a price band of Rs 350-368/share.

Those selling shares in the OFS are Devesh Sachdev (founder and chairman of the MFI), his wife Mini Sachdev, Honey Rose Investment and two funds of Creation Investments Fusion, the Dutch impact investor Oikocredit Ecumenical Development Co-operative Society, and Global Financial Inclusion Fund. Of these, Honey Rose and Creation Investments are funds owned by Warburg Pincus which entered the MFI in 2018 with a Rs 520 crore funding.

"We've been lending to MSMEs for some time now and currently have Rs 200 crore assets under management. This is a fully secured loan and we give up to Rs 3.25 lakh to borrowers most of whom are existing borrowers. Post-IPO, we want to scale this book up and will be hiving off as separate NBFC but will remain part of the parent Fusion," Sachdev told PTI over the weekend.

"So far, we've been using our own capital for onward lending through this but once we separately launch the business we'll borrow separately from banks, wherein we will get funds at a marginally cheaper rate, as banks are only willing to lend/co-lend to MSMEs for one and for another this is a fully secured book," he added.

Currently, they are lending through this model at the MFI rate which is upwards of 22% on which the lender earns a margin of over 11% as its cost of fund is just about 10.10%.

May be once we are get larger we can lower the rates for these borrowers as then we will also be borrowing separately for this from banks, he said.

Fusion's current loan book is a shade less than Rs 7,400 crore -- as of June 2022 in an industry that has an AUM of $35 billion -- of this a tad over Rs 200 crore is the MSME book, he said. Fusion has close to 970 branches spread across 377 districts in 19 states but most of them are concentrated in Bihar and UP, and it employs close to 10,000 people.

Fusion has one of the best asset quality in the industry with a GNPA of 3.67% and an NNPA of 1.35% and a provision coverage ratio of 96, as of June.

The MSME vertical already has 70 branches manned by a 400-member team and this will go up as we scale up, he said, adding already has a 6,000 strong customer base, he said.

On the asset quality of this vertical, Sachdev said this is as good as the MFI book with the net NPA being only at 1.29% as the loan to value against the collateral which could be the shop/plant/other assets, is only 65-70%.

The highly cluttered MFI space is led by CreditAccess Grameen (which is also the largest in terms of AUM), Fusion, Asirvad Microfinance, Muthoot Microfin, Annapurna Finance, Samasta Microfinance, Satin Creditcare Network, Svatantra Microfin, Spandana Sphoorty Financial, and Belstar Microfinance.

Pre-offer Honey Rose Investment (Warburg) directly owns 48.65% in the company and the two Creation Investments Fusion funds, Oikocredit Ecumenical Development, and Global Financial Inclusion Fund holding another 36.56% and the Sachdevs 8.21%, taking the total to 85.21%. Post issue Warburg will pare 12% and Sachdevs under 1% to take their stake to 7.5%.