The microfinance industry may finally be seeing the beginning of good times, with both equity and debt funding making a comeback into the sector. Owing to relative stability in the industry and increasing clarity in regulations following the Malegam Committee report, the last two months have seen better-than-expected activity on the venture capital (VC) and private equity (PE) fronts, with more expected in the next couple of months.

Last week, the UK?s Citi Venture Capital International pumped in R65 crore into Bangalore-based microfinance institution (MFI) Janalakshmi Financial Services. In May, Switzerland-based Blue Orchard Private Equity invested R4.5 crore in Mumbai-headquartered Svasti Microfinance. Ujjivan Financial Services, a Bangalore-based MFI, raised R30 crore in overseas non-convertible debentures (NCDs) and had also raised R65 crore from IDBI Bank and Sidbi in March. Securitisation deals include Avendus Capital?s buyout of R10.8 crore worth of micro-loans from Tamil Nadu?s Grama Vidiyal Micro Finance.

?Funds are not flowing in like they were prior to the crisis. But we are seeing some good signs. Fund suppliers are bullish for the long term due to the increasing clarity in regulations and Reserve Bank norms,? said Suresh K Krishna, managing director of Bangalore-based Grameen Financial Services.

The country?s microfinance sector, which has over R30,000 crore in outstanding loans to 300 crore borrowers across the country, has been facing a severe cash crunch since October last year. Lending by banks and investments had come to a standstill following regulatory changes by the government of Andhra Pradesh, which has the largest share of the microfinance market in the country.

?Apart from securitisation deals and NCDs, we have seen equity funding in the sector in the past months and we are extremely likely to see at least a couple of more in the next two months,? Krishna added.

Janalakshmi, for one, is looking at raising close to R65 crore in equity in the next one month. Grameen is looking at raising R300 crore to R500 crore in FY12, while Ujjivan is currently eyeing R100 crore in equity.

According to venture capitalists, funders still recognise the opportunity in financial inclusion, considering the headroom still available, and will continue to invest.

P Pradeep, chief investment officer of Avishkaar Venture Management Services, which invests in MFIs, said, ?Nearly 80% of the microfinancing happens out of two states (Andhra Pradesh and Karnataka), and there is an enormous opportunity to grow here. To an investor, a good proposition, a good team and that team?s capability to plan and run the show are of greater consequence while investing. I do not think that investors will ignore the opportunity due to a problem.?

Avishkaar has recently concluded one deal in the space and may close another in the next one month. It is also looking at raising funds for MFIs it has lent to in the past and other companies in the microfinancing ecosystem, such as those which work on technology for financial inclusion. However, interest from equity players as well as social funds and development finance institutes has been encouraging, bank lending is yet to resume.

?Banks are still waiting for MFIs to come out with year-end financials and for fiscal assessments. The next two months should be a good indication of how bank lending will resume. However, I believe bank lending will fall with fewer banks lending, ? said Samit Ghosh, founder of Ujjivan.

At a recently concluded conclave on the microfinancing industry, the Associated Chambers of Commerce and Industry of India (Assocham) said that it was working on providing a platform for discussion between equity players and international MFIs to reduce the dependence on institutional lenders.

?Global microfinancing has around $12 billion in cross-border investments. Inbound M&A deals could emerge as a new trend in India?s MFI space,? Dilip Modi, president of Assocham, had said.

However, MFIs that have recently raised funds feel that there has been a sea change in the perception of equity players, who are now highly cautious in picking the right horse to back. Evaluations of business models, plans, teams, and understanding of process requirements are now far more stringent than a year ago, making it difficult for smaller organisations to survive.