India: PE funds take a liking for micro-finance institutions

Aug 2007
India, August, 07 2007 - Private equity funds with a special focus on micro finance institutions have lined up billions of dollars for the sector in India.

For instance, Aavishkaar Goodwell, a micro finance private equity company, is building a $25 million portfolio across India, $2 million of which has already been invested into Share Microfin, a micro finance company with over a million clients. Funds such as Bellwether and Lok Capital have also lined similar plans.

Private equity funds raise capital from financial institutions and banks and lend it to micro finance companies, mostly for equity. For example Deutsche Bank, Netherlands Development Finance Company (FMO) and International Finance Corporation (IFC) of the World Bank group have provided funds for Aavishkaar Goodwell. IFC and FMO have also invested in the $12 million Lok Capital fund.

Some other private equity funds have lined up much bigger sums. “For India we are not talking millions but billions,” says Vikram Akula, founder of the new age micro finance company SKS.

On March 29 this year, global venture fund Sequoia, which has made high-profile investments in companies like Yahoo, Google and You Tube, led a $11.5 million investment in SKS.

But why this craze for India?

“A majority of the billions of private equity funds are going to make their way to India because of the large number of people here,” explains Akula.

India is the second most populous country behind China with a large number of un-financed poor people, the main clients for micro-finance companies. Unlike China, where state sponsored schemes and co-operatives cover most of the county, India is a easier place to do micro-finance business because of the opportunity and growth. Latin America is also a vast market for micro finance but it is far more sophisticated.

“The success of micro finance institutions in making small loans for the poor viable - with good returns for investors over the last few years — has helped. Though the economy and the financial sector are strong, there are still untapped opportunities at the ground level,” Akula said.

The World Bank’s Consultative Group to Assist the Poor (CGAP) had estimated that investment in micro finance institutions has tripled in two years to reach $2 billion in 2006. By those estimates, the figure could easily touch $3.5 billion of 2007 even conservatively.

The CGAP survey that showed that are 74 specialised microfinance funds, with 16 new funds created in 2005, and 14 additions in 2006. It also found a huge increase in direct investment in micro finance institutions, to $1.5 billion in 2006.

Within India too the opportunity is in the north and the north-eastern parts of the country where still a large part of the un-banked stay. South India has more than 70% of the micro finance institutions in the country.

“We would look to concentrate on those parts as it would also lead to a reduction in geographical imbalance,” said Vineet Rai from Aavishkaar Goodwell.

The fact that these funds are lining up such huge investments automatically means that they are expecting profits. “There is always a risk perception in investments, but the prize is that, as the income of the rural borrowers increase, the demand for products such as insurance will rise,” said Mathew Titus, head of Sadhan, an association of community development and finance institutions.


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