India: Growing Interest of Private Equity in Microfinance Institutions

Jun 2010
New Dehli, India, June, 26 2010 - Microfinance Institutions (MFIs) have emerged as an investment hot spot for Private Equity (PE) due to its rapid growth and high returns, growing at a Compound Annual Growth Rate (CAGR) of 105 per cent in the last five years.

This was a consensus view which emerged at a recent conference which focused around the increasing interest of PE players in the Indian micro finance industry.

Organised by ACCION International in collaboration with EDA Rural Systems and Citi Foundation, the conference came in response to the rising capital requirements of a bullish micro finance sector and an equally growing interest of mainstream investors in this social industry.

The event also threw open an investment marketplace for the stakeholders who came from across the globe to evaluate different funding options and the associated risks.

The two-day event witnessed participation from more than 300 industry experts, investors and micro finance institutions.

The experts said in the last 18 months, close to 200 million dollars in PE have been invested in Indian MFIs and millions more are in the offing. While the interest in micro finance equity investments is high, the market is still young and is posed with many vital challenges, including issues around sustainability and elements of bubbles in the growth.

Much of the discussion at the conference focused around how the micro finance equity valuations remain a cause of concern for the potential investors.

The sector which bagged a major chunk of PE deals in the country last year is often reported for losing its sheen to the investors due to skyrocketing valuations.

Industry reports suggest that MFIs have valuations as high as five to six times the book value and investors are now approaching the sector with caution.

An alternate view, however, rejected the idea of high valuations comparing MFIs with traditional banks, because they are in the same business of providing financial services to clients.

According to Padmaja Reddy from Spandana, a major player in the Microfinance Industry, Return On Equity (RoE) for micro finance organisations has been 170 per cent compared to 57 per cent for traditional banks for the period of 2006 to 2009.

The seminar also took up the issue of Non-Convertible Debentures and Securitisation as popular routes for Debt Funding.

Micro finance institutions in South Asia have been exploring innovative debt financing deals to support their robust growth. They have increasingly been tapping on Non-Convertible Debentures to create a diversified lender base and have raised significant foreign debt funding via this instrument.

Leading players like SKS, Grameen Koota and Spandana Sphoorthy have raised hundred crores worth of funds by way of issuing NCDs.

For investors, NCDs still remain a good option given the Fixed Income scenario. Essentially, these NCDs are more attractive as the companies typically offer two to four per cent higher returns than the fixed deposits.

Moreover, they attract no TDS on interest as they would be issued in a dematerialised form and listed as a security in the National Stock Exchange.

Driven by the stupendous growth, micro finance organisations have started exploring a plethora of financing instruments to secure substantial funds and expand their lending base.

The speakers discussed non-convertible debentures, syndication, securitisation and bond issues as some of the financing structures that have gained popularity and are likely to be employed for future fund raising.

Summing up the key findings from the conference, Ms Monica Brand, Principal Director, Frontier Investment Group, ACCION International, said, ''In a country like India where 60 per cent of the population is unbanked, Micro finance plays a crucial role in enabling rural citizens to explore economic opportunities and improve livelihood.'' While the local Micro finance industry continues to grow it has its own set of challenges such as regulation, transparency, lending rates and multiple lending, which need to be addressed if the government is to achieve its goal of larger financial inclusion.

The conference enabled bringing together global and local subject matter experts who have not only shared best practices but also outlined recommendations to help the micro finance industry move to the next level.

Source :

Research Analysis Tools

The fund indexes, institution benchmarks and other market information displayed here are all Symbiotics designed analysis tools, created in-house by our analysts and experts. Symbiotics has one of the oldest track records in microfinance investment analysis dating back to the late 1990s; its indexes and benchmarks have been regularly used as markers by investors, asset managers, financial institutions and practitioners. These, as well as several other research products, are available through the Research Account. Click on the link below to find out more.

Learn More