Banks may be down, manufacturing in a slump and technology stagnating. But there is a hot new sector for private equity (PE) and venture capital funds – India’s rural microfinance institutions, often called MFIs.
Established private equity players are now entering a game where early-stage investors moved in two years ago as pressure builds up for safer zones with higher returns.
Most PE funds look at getting back five times the amount invested or more in under five years.
Last November saw the world’s largest microfinance deal when Hyderabad-based SKS Microfinance raised $75 million from PE investors in its fourth round of funding. Sandstone Capital, an India-focused hedge fund with $1billion capital under management, led the deal.
The new MFI enthusiasts include Lok Capital, Unitas and even respected Sequoia Capital, which has funded companies like Apple Computers and Google.
“Most people who borrow money from rural microfinance companies do it for a livelihood, and may get returns of up to 150 per cent. This is money working, not a car loan,” said Gautam Patel, managing director of Battery Ventures, which plans to invest 15 to 20 per cent of its global funds in this area.
Battery Ventures is a 30-year-old organisation that has invested in companies such as Akamai and Travelguru, and has only recently begun shifting focus towards sectors such as microfinance.
Indian investment bankers say the MFI secret lies in the business model that controls loans that stop yielding returns.
“Non-performing assets for most rural microfinance companies could even be lower than 1 per cent of their net worth,” said Suraj Kalra, an investment banker with Enam.
To compare, India’s largest banks, SBI and ICICI, had NPAs of 1.78 and 1.55 in fiscal 2008, according to a report from Yes Bank.
India’s microfinance sector now reaches out to 3.68 crore borrowers, about 50 per cent of the estimated potential. While the self-help group (SHG) model commands a dominant share, private MFIs have been growing faster, say industry-watchers.
According to research firm Intellecap, the 60 largest MFIs have close to 10 million customers and a cumulative outstanding portfolio of $ 769 million.