One tipping point was in 2004-05 when the partnership model by ICICI Bank showed that scale can be achieved in microfinance. (ICICI Bank would forge an alliance with an MFI, which would identify, train and promote the clients and ICICI Bank would finance the clients directly.) This made the sector interesting — at least for the debt providers at that time. The second tipping point was Vikram Akula (of SKS Microfinance) standing up and saying I can raise capital and actually scale up.... Basically what he showed was that you can scale up rapidly and become fairly large.
...There are a few things you need to look at today. You need capital, which brings with it the issue of valuation and ownership and greed. We started with client acquisition as a model. Now the investor question is client stickiness, and differentiation has become the buzzword. Nobody wants to invest in another Grameen model and it is not because that model is wrong but it is that if you are going to be a single product MFI then the scope for value creation is almost insignificant. Client stickiness can be done in multiple ways. Basix does that by providing livelihood and services, Equitas does that by providing rice and oil. When push comes to shove, who will the client drop first? That becomes an important ingredient in our due diligence.
Second, if you visit the websites of the top 10 MFIs, everyone says we are removing poverty but during the discussions here, it seems to be all about valuation and capital. While there is nothing wrong with valuation and capital, it is just that post-2005 we have come to clearly articulate what we are. We have still not got away from the realities of how we started in 1995. We were supposed to be the do-gooders... even though we were charging interest rates of 40 per cent. Today, while we reach millions of people, we are perceived as fleecing the poor at rates of 28 per cent. The moment you start measuring in terms of billion-dollar valuations, you begin to look very bad. So I think we will lose the battle on the management of perception rather than the reality. It is not true that the interest rates have not fallen. They have.
Arun Natarajan is the Founder & CEO of Venture Intelligence, the leading provider of data and analysis on private equity, venture capital and M&A deals in India. View free samples of Venture Intelligence newsletters and reports. Email the author at email@example.com