India: Foreign Investors Chasing Bigger Gains by Investing in Microfinance Insti...

Sep 2014
India, September, 17 2014 - Instead of raising their holdings in companies such as HDFC Bank and IDFC, the infrastructure lender which is turning into a bank, investors are chasing the profitable microfinance institutions.

So what if regulations and restrictions are preventing foreign investors from enlarging their share of the Indian financial pie. Instead of raising their holdings in companies such as HDFC Bank and IDFC, the infrastructure lender which is turning into a bank, investors are chasing the profitable microfinance institutions.

Microfinance — giving small-ticket loans to tiny businesses in semi-urban and rural India, which by definition is not for the sophisticated investors — is increasingly becoming the hot favourite of global investors. The share of foreign holding in Indian microfinance institutions has risen to nearly a third from just about a fifth a few years ago, data from rating companies show.

Multilateral lender International Finance Corp and private equity Caspian were among the ones to invest in Indian microfinance companies when their funding dried up with little to invest in the corpus of Small Industries Development Bank of India and when others were hesitant.

At least half of SKS Microfinance, the biggest and the only listed microfinance company in India, is held by foreign investors. Bandhan Financial Services is 10.9% owned by IFC, and nearly twothirds of Ujjivan Financial Services is held by overseas investors, data show.

Microlending may be small, but it is probably the most lucrative and profitable segment in Indian financial services with a potential to charge as high as 27.75%, as more than half the Indian population is untouched by organised finance. "Overseas investors are keen in taking exposure to MFIs and, thereby, indirectly financing entrepreneurial drive of the country's economically backward population," says Chandra Shekhar Ghosh, founder of Bandhan. "And they are earning good returns from it, while domestic investors are not keen on taking the risk."

The scope for enormous profits has brought with it its share of controversy. The state of Andhra Pradesh, the breeding ground for microfinance institutions, promulgated a law in 2010 to protect borrowers following complaints of harassment from recovery agents that, some alleged, even led to some suicides. The Reserve Bank of India had to step in with a committee under its board member YH Malegam to come up with rules to ensure order. SKS lost more than 90% of its market value due to the controversy. It has recovered since, and investors are now again flocking to the company.

All the top 10 MFIs have a diversified mix of investors — from International Finance Corporation to private players like Michael & Susan Dell Foundation, Citi Venture Capital International, Caspian, Sequoia Capital, and Legatum. These investors have high stakes in the India microfinance growth story. Microlenders have raised nearly Rs 2,000 crore in capital in the past three years and they may need about Rs 1,800 crore of equity over the next two years, forecasts Crisil, the local unit of Standard & Poor's. Their assets are poised to touch Rs 45,000 crore by March 2016, from about Rs 26,000 crore now.


As the size of the industry grows, instead of more players coming in, it is the established ones and those with the backing of big investors that are benefiting. Smaller microfinance institutions perennially suffer from lack of capital and remain tiny, making the Indian MFI market oligopolistic, one which is controlled by a small group of firms with heavy dose of private capital. Small Industries Development Bank of India, or Sidbi, is the lone state-run equity provider to smaller MFIs, but its pitiable Rs100-crore corpus is merely a drop in the ocean. According to ICRA, the top three MFIs control 48% of the market, while the top 10 corner 77% of loans to the poor.

Microfinance Institutions Network, the association of NBFCMFIs, has 48 members controlling 90% of the microloan market. Post the Andhra Pradesh crisis, many NGO-turnedmicrolenders dissipated; the industry is being largely ruled by the likes of Ramesh Ramanathan, Samit Ghosh and PN Vasudevan — all high street bankers previously.
Ramanathan's Janalakshmi Financial Services is the third-largest MFI by outstanding loans, while Ghosh's Ujjivan Financial Services and Vasudevan's Equitas ranked fourth and fifth, respectively. The secondlargest SKS Microfinance, the only listed MFI, is led by MR Rao, who served ING Vysya Life Insurance, American Express and Standard Chartered Bank prior to joining SKS in 2006.

"Access to finance is a key differentiator," says Ujjivan's Ghosh, who led the launch of retail banking for Standard Chartered in the Middle East and South Asia and for HDFC Bank in India. "Having strong banking background does make a difference in mobilising funds and scaling up business."


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