IFMR Track presented by Ms. Bindu Ananth, President, IFMR Trust, on New Financial Instruments for Social Enterprises at Khemka Forum on Social Entrepreneurship.

1. New Financial Instruments for Social Enterprises Bindu Ananth

2. Enterprise Financing 101 Expected returns of the enterprise need to be positive, for lender or equity investor Lenders are providers of liquidity, not risk capital Very high volatility (sales and price) poses a challenge to lenders; lenders need a cushion for bad years Equity is willing to take uncertainty, but is scarce and needs to be compensated (read ROE > 20%) Direct equity infusion might be unviable given the size and legal nature of the average social enterprise

3. New Approaches to Financing Three questions to deliberate: How can a not-for-profit enterprise raise risk capital? Mezzanine finance How can a lender take exposure to a set of clearly identifiable assets with the enterprise itself being a servicer/facilitator? Securitisation/cash flow trapping/commodity finance Are there trade relationships that can substitute for equity for the enterprise? Receivables financing

5. Mezzanine Finance for Not-for-Profit MFIs (cont.) Mezzanine finance – a innovative medium for MFIs to facilitate growth Subordinated debt structures and convertible debt Term loans with maturity of 3 – 7 years Guarantee based instruments such as First Loss Deficiency Guarantee Subscribe to Junior tranches in a securitization transaction Treated like equity in the balance-sheet and enables leverage without proportionate Tier 1 equity High coupon, may be combined with revenue sharing arrangement No “ownership” for the mezzanine lender

6. Case 2: Microfinance Securitization Mechanism Homogenous, high quality but illiquid financial assets are pooled to create marketable securities Creates a class of portfolio that has a higher rating than the issuing company Issues are usually rated by an accredited credit rating agency Junior notes may be subscribed by an entity packaging the assets Benefits to MFIs Ability to raise finance at a relatively low cost Partial or total removal of assets from its balance sheet Diversification of funding sources, access to the capital markets Impart pricing flexibility on the lending side and enhance return on assets deployed

9. Case 3: Commodity Financing for Producer Co. Commodity-producer co. have traditionally raised financing via straight lending, which has been constraining Commodity financing could help unlock collateral value embedded within producer companies Unlike traditional financing which focuses on flow of funds and the financial strength of the borrower, leverages the existence of commodity or asset to improve the credit quality of financing

11. Loan eligible as ‘direct-agri priority sector’; lower rate of interest

13. School Fee Receivables Financing (cont.) School can raise financing against future school fee receivables Predictability and granularity of receivables A cash flow trapping mechanism of the fee receivables of the school Students’ fee to be remitted to the lender directly and paid to school after deducting repayments A village branch infrastructure required

14. Case 5: Buyer-Linked Supply Chain Financing Credit quality of a standalone producer very different from a producer with a robust buyer arrangement A new way to release trapped cash from operations Third-party financier provides liquidity to suppliers by leveraging the buyer’s higher credit rating Benefits Accelerating producers’/aggregators access to lower cost of capital without infusion of extra equity Reduce working capital requirements through improved days payable outstanding

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