New Delhi: In a volatile economy, microfinance institutions are offering stable returns over the long term and have begun to draw investor interest.
The quarter to September saw the most hectic venture capital action in microfinance yet, according to data collected by Venture Intelligence, which tracks such investments in the country.
“If the banking and financial services sector was the second favourite destination for venture money in that quarter, it was largely thanks to microfinance companies,” says chief executive Arun Natarajan. “Microfinance was heating up even of its own accord, but given that other investment options are falling off the radar, it is standing out even more now.”
With a huge base of borrowers and emphasis on timely repayments, microfinance is relatively insulated from defaults. It also targets a different demographic—rural, rather than urban, borrowers—which lends it the appeal of a robust alternative.
“The credit crunch has had some impact on the sector, but the larger microfinance firms have not been affected as much,” says Abhijit Ray, vice-president at microfinance consultancy Unitus. Ray has seen “at least 10-12 mainline investors” grow interested in this sector, displaying the sort of zeal absent earlier.
“Also, many investors would earlier not want to talk about any amount below $25 million (Rs124.5 crore),” he says. “But now, they’re even willing to discuss investments of $10-15 million.”
That fits with the Venture Intelligence data, which cites two of the three deals in the three months to September as involving investments of $20 million or less. The values of the third deal was not publicly disclosed.
But Vineeth Rai, chief executive officer of Aavishkaar Venture Management Services Pvt. Ltd, cautions against reading too much into the recent activity.
“It is just the natural lifecycle of the Indian microfinance sector that, as it develops, it will attract more deals,” he says.
The next six months will further determine the contours of microfinance activity by determining the answers to key questions: Will banks continue to lend? Will microfinance prove immune to the credit crisis? Will the larger microfinance institutions still carry out any plans to go public if the stock market continues to be lukewarm?
Rai predicts there will be five-seven more deals in the October-December quarter; over the next six months, he forecasts seven large deals and 10-15 smaller ones.
“There will simply be more smaller deals and fewer bigger ones, as microfinance institutions get into later stages of raising capital,” he says.
P.N. Vasudevan, managing director of Equitas Micro Finance (India) Pvt. Ltd, which successfully raised $12 million from a troika of investors in August, similarly predicts a flurry of activity in microfinance, which he calls a “good, socially relevant sector”.
“What will happen is that interest will be translated into investment. Mainstream private equity investors will sign deals instead of just studying the potential,” he says. “Once someone else plants the flag, people will feel a lot more comfortable following suit.”