India: Tap fledgling microfinance business

Jan 2008
India, January, 06 2008 - In India, microfinance is increasingly seen to be providing a platform for the banking industry to reach out to the financially excluded sections in the country, which is around half of India’s population.

When Professor Mohammed Yunus of Bangladesh’s Grameen Bank won the Nobel Peace Prize in 2006, the microfinance sector came of age, in a way and captured the imagination of not just investors but also the common man across the world.

After that, 2007 was another big year when the sector earned greater credibility and its social dimension seemed to offer the right balance between profitability and responsibility towards society.

“In the last two years, the Indian microfinance industry attracted a lot of large institutional players. Bankers have been increasingly talking about financial inclusion and no-frills accounts. The intent within government circles is to reach banking services to the unbanked. MFIs are in the best position to cover the last mile for banks.

Technologically, too, there has been a lot of interest and progress on bridging the urban-rural divide. The sector is therefore poised for growth,” explains M R Rao, chief operating officer, SKS Microfinance.

There are big deals being done in the microfinance sector with big banks, VCs and PE funds making a foray into these earlier uncharted waters.

“From being a grant sustained development intervention, microfinance in India has now become a sustainable form of development that is achieving both bottom lines, the social as well as commercial. Besides the capability of attracting large, international institutional investors, the sector is also attracting a number of professionals from corporate backgrounds who are coming forward to set up new age MFIs,” says Sakshi Varma, financial analyst at Lok Capital, a Mauritius registered fund.

So what made 2007 so action-packed MFIs in India? While SKS received a round of funding of $11.5 mn from Silicon Valley-based VC Sequoia; JM Financial Fund and Lok Capital invested $12.5 mn in Spandana, another leading MFI. And in the largest ever deal, Share Microfin, received $27 mn from Dubai’s Legatum Capital (which invested $25 mn) and Aavishkaar Goodwell ($2 mn).

Further, the country’s largest private bank ICICI Bank has announced plans to expand its rural exposure to 25% of its total loan portfolio within two years. Currently, ICICI Bank already has more credit exposure to the rural microfinance space than any other private sector bank.

ICICI Bank has also formed partnerships with three microfinance funds to extend seed capital to start-up MFIs. Development Credit Bank has also unveiled a microfinance-oriented division. World Bank arm, IFC, the Netherlands Development Finance Company (FMO), and Deutsche Bank have announced a joint investment in Aavishkaar Goodwell.

The bigger picture is also getting brighter for MFIs. In September 2007, Morgan Stanley announced the formation of the Morgan Stanley Microfinance institutions group and JP Morgan too is setting up a social sector finance unit. In the larger global context and in India, the change in mindset is seen as having a big impact on the microfinance sector.

“Microfinance is evolving and the coming years will see it making a definite impact across rural and urban India. The demand for microfinance is huge and if funds come in and MFIs are able to not just meet this demand but also ensure they maintain their service quality levels and recovery rates, it could be a very powerful tool in allowing the poor to access services they have never been exposed to and had to always pay a premium for. The entry of foreign VCs will ensure more professionalism and accountability. This should help change the mindsets of people who feel MFIs should be driven by grants and efforts of NGOs. We at SKS believe the poor are not looking for charity but for an opportunity. MFIs are best placed to offer that opportunity to the millions who have not been able to find a way out of poverty for the last 60 years of Indian independence,” says Mr Rao.

Of course, for experts, 2007 is just the beginning of good times to come. Feels RV Bhavani, director, BV Rao Centre for Sustainable Food Security at Chennai’s MS Swaminathan Research Foundation, “In terms of institutional players entering the microfinance sector, the trend will only grow bigger. Institutional players find it easier to extend credit at the grassroot level through NGO-microfinance linkage, both in terms of lowering transaction cost and reducing risk.”

Ms Varma too has a word of caution. “With the larger MFIs growing at a scorching pace, tier II MFIs gearing up for fast growth and a number of new age MFIs being established, there is an increasing need for debt and equity capital for the sector to maintain the vertical growth curve. Besides, as more and more mainstream VC and PE players come in, the challenge is to maintain a balance between social objectives and commercial goals,” she says.

It looks like a win-win deal, an industry with a heart of gold is all set to find its pot of gold.


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