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Submitted by Jayshree Venkatesan | IFMR Mezzanine Finance on
One would have to agree with the data and the insights that have been presented in the blog post. However, mezzanine financing seems to provide the means to combine the goals of correcting market failures while reaching the world’s poorest. Like the article points out, NGO-MFIs do reach a larger number of borrowers and therefore form a critical channel to facilitate access to finance. However, as the article also points out, the profits earned by institutions that serve the poorest customers are too little to attract investors with a commercial intent. Further, transaction costs tend to be higher at a smaller scale, forcing the NGO MFIs to charge higher rates of interest. Most NGO MFIs come with limited equity capital. The lack of attractiveness that NGOs pose to other equity players acts as a barrier to raising further equity. Most lenders look at equity as a risk cushion against defaults. With a limited equity base, the ability for NGO MFIs to attract debt capital is also severely constrained. The lack of access to capital, in turn, prevents NGO MFIs from growing further, which in turn results in high transaction costs that get translated into higher interest rates. Mezzanine finance acts as an intermediate, cushioning layer between debt, which is provided by banks and the promoter’s equity. Mezzanine finance instruments could range from long term subordinated debt instruments to preference shares with variations to product structures that fall between these two categories of mezzanine products. In case of a potential default situation, mezzanine finance providers recover their money only after all the lenders get paid, thereby acting as an additional risk cushion. Since mezzanine finance providers undertake risk that is almost akin to equity, it is also in their own interest to ensure that process related issues are addressed in the MFI, which in turn has an impact in reducing overall transaction costs. Since most NGO MFI clients work among the poorest clients, this can allow the poorest to access funds at a lower rate of interest. In keeping with IFMR Trust’s overall mission of ensuring that every individual and every enterprise has complete access to financial services, IFMR Mezzanine Finance is working towards providing access to capital to smaller, capital constrained MFIs in the sector.