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December 19, 2008

Why MFIs have become a magnet for PE investors

Growth, growth and growth says this article in Economic Times.
This shift in the nature of the investor has been driven by scorching growth in the micro finance sector over the last two years. MFIs, especially the larger ones, most of whom operate as non-banking finance companies (NBFCs), have been consistently growing at 200%-plus. SKS and Spandana would both fall in this category. Some like Bandhan in West Bengal have grown at an astounding rate of 600% per annum. However, Bandhan is yet to open itself to PE players.

In fact, this fiscal, a cluster of large and mature micro finance entities appear set for over 100% growth as inflationary trends have triggered higher working capital needs for micro loanees. In the first quarter of fiscal 2009, these MFIs have bettered their half yearly disbursals of FY08. In other words, the demand for working capital needs by MFIs has outstripped the quantum that small PE investments or SIDBI could so far provide. Hence the bid to woo mainstream PE players.

Going forward, if there is one thing the sector is assured of is growth. Back of the envelope calculations show that the poorer sections of urban and rural India have a combined credit appetite of over Rs 2,50,000 crore and barely 10% of this is serviced. The PE players clearly recognise the immense business potential this unfulfilled demand holds out. On the supply side, this high cash business surely promises high returns, if not huge. “From an investment perspective, it is very attractive,” says Venky Natarajan, Investments Director of Lok Advisory Services. “If you have put in your money last year or two years ago, you could expect a rate of return upwards of 70%. Currently, the average returns stand at around 35%,” he adds. Lok Capital is an investor in Spandana and has recently picked up stake in Bangalore-based fledgling MFI-NBFC Ujjivan which works with the urban poor.

Arun Natarajan is the Founder & CEO of Venture Intelligence, the leading provider of information and networking services to the private equity and venture capital ecosystem in India. View free samples of Venture Intelligence newsletters and reports. Email the author at arun@ventureintelligence.in