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India’s microfinance sector

India’s microfinance sector

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Published by Vikas
Over the past few years microfinance in India has morphed rapidly from a charitable endeavor to a profitable business and then to flavour of the month for private equity investors and venture capitalists.
Over the past few years microfinance in India has morphed rapidly from a charitable endeavor to a profitable business and then to flavour of the month for private equity investors and venture capitalists.

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Published by: Vikas on Mar 31, 2009
Copyright:Attribution Non-commercial


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Buzz around India’s microfinance sector quietens
Over the past few years microfinance in India has morphed rapidly froma charitable endeavor to a profitable business and then to flavour of the month for private equity investors and venture capitalists.It was a startling transformation for a sector that until recently wasconsidered a non-profit business. High repayment rates of about 98 percent and a vast pool of “unbanked” Indian customers who need smallloans woke banks and investors to the serious business potential of thesector. The buzz around microfinance grew in 2007 when Sequoia, the venturecapital firm that backed Google and Apple, invested $11m (£7.6m,€8m) in SKS, one of India’s largest microfinance institutions (MFI).Other deals followed, including a $27m investment in Share Microfin,from Dubai’s Legatum Capital and Indo-Dutch Aavishkaar Goodwell;and a $12.5m investment in Spandana, another leading MFI, by India-based JM Financial Fund and Lok Capital.But since the global financial crisis deepened last year, the buzz aroundmicrofinance has quieted. What is in store for microfinance in India?In spite of uncertain conditions worldwide, the long-term outlook formicrofinance is largely positive though the sector’s stratosphericgrowth will surely slow. In India, the sector grew 79 per cent in 2007 interms of value of loans outstanding.The financial crisis brings to light the inherent strength omicrofinance. Microfinance is the only asset class that has had zero
delinquencies in the last five years,” says Moumita Sen Sarma, head of microfinance at ABN-Amro in India, referring to the bank’s portfolio.“We are trying to grapple with other issues but our commitment tomicrofinance is still strong.”Although Indian banks have been hit by delinquencies on consumerloans, repayment rates for micro-loans remains high at the majority of microfinance institutions. Their core business – distributing small loansto help poor borrowers start income-generating work is still indemand.”Investors are still viewing microfinance as an alternative asset class,”says Robert Annibale, head of global microfinance for Citi.However, MFIs are hurting as overall liquidity from banks dries up.Commercial banks supply money to MFIs, which then use theirgrassroots networks to distribute small loans to customers mainly inrural India.India’s largest MFIs are better able to weather the storm. Big banksprioritise lending to those established players, which still attract someinterest from investors.Even in the midst of the global financial crisis, SKS Microfinance India’s largest MFI – last November sealed a $75m deal. Sandstone, aUS hedge fund, Kismet Capital and SVB India Capital, an affiliate of Silicon Valley Bank, together took an undisclosed stake in SKS in whatwas the largest-ever deal in Indian microfinance.
Previously the largest deal was a $37m investment in SKS in late 2007by a group that included Sequoia, Silicon Valley Bank and Vinod Khosla,founder of Sun Microsystems.Microfinance has also been favoured by “social investors” who areinterested in social as well as monetary returns, such as Legatum andOmidyar Network, set up by eBay founder Pierre Omidyar. Last yearthey each invested $10m in Unitus Equity Fund, a US fund that investsin microfinance in India and Latin America.Although the largest MFIs are more insulated from the impact of thefinancial crisis, dozens of smaller MFIs have been dealt a stinging blow.Banks tend to fund the big players while ignoring fledgling MFIs,resulting in slower growth rates.“When banks are flush with funds, microfinance is fashionable to investin and is a priority. However, when liquidity dries up, it’s no longer apriority. Fund flow to the microfinance sector has been severelyreduced,said Vipin Sharma, chief executive of Access, a leadingmicrofinance advisory company in India.Banks are “a lot more cautious about lending”, agreed P N Vasudevan,managing director of Equitas, a new MFI that launched in Chennai inDecember 2007. “There’s definitely a slowdown, there’s no questionabout that.”Mr Vasudevan says his customers continue to repay loans at high ratesbut because of less liquidity from banks, Equitas’ growth projectionshave tapered. It had targeted reaching 450,000 total customers by theend of this month but the figure will remain closer to 350,000.

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