Although private equity funding in India seems to be on the decline after the recent boom, the microfinance sector seems to be bucking the trend. These institutions have now become a darling for PE firms to invest in.
Private equity firms looking for recession proof companies are finding Indian micro finance institutions very attractive. According to Venture Intelligence, a Chennai-based agency that tracks PE investments, deals worth USD 242 million took place in the microfinance sector in the last 12 months and 60% of that funding went to Hyderabad-based microfinance institutions alone.
These include USD 75 million raised by SKS microfinance, USD 50 million raised by Share Microfin, and USD 22 million by Spandana.
So, why micro-finance institutions are able to raise funds when companies from other sectors are struggling?
M Udaia Kumar, MD, Share Microfin, said, "MFIs have grown 100%, the return on equity is 24–27%, and the performance of MFIs is very good especially in countries like India where only 10% demand is met. Different products can be linked with MFIs as they have built large networks."
The UPA government's aam-aadmi focus is certainly helping these MFIs. By lending to these institutions, banks were able to meet their priority sector lending targets set by the RBI. MFIs have, in turn, set an ambitious target to increase their own lending by 50% this year.