Nobel Laureate Muhammad Yunus, who was in Bangalore last week, said that microfinance institutions (MFIs) should not forget their mission of removing poverty.
Are MFIs drifting from the mission with “some international venture capitalists and hedge funds seeing it as a lucrative business opportunity”, as Yunus put it?
Venture capitalists and equity investors are making a beeline to put their money in MFIs. Lok Capital, Bellwether and Sequoia Capital , all have opened their purse strings for MFIs. But they say that they cannot afford to be anti-poor.
Bellwether and Lok Capital were the earliest to put up money for poor loans. These funds invest only in MFIs.
Vishwanath Prasad, fund manager for Bellwether, says it is not fair to look at investors like him as anti-poor.
He says that the team running Bellwether funds comprises people from the microfinance and social sector. They floated the fund because they felt that microfinance funds should be as efficient as a well-run company, he adds.
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“There are two options. Either do it in a not-for-profit mode and attract X dollars in capital or do it in a sustainable manner and get 100 X dollars’ capital,’’ he says.
He adds: “Ultimately, the charge from the customer is the same. The difference is that the MFIs now look at the borrower as a client rather than a mere beneficiary. The strategy is to offer more products than just credit. There is no rule that those who work for the poor should work poorly, or their working model be unsustainable.’’
Bellwether has invested in ten MFIs. It provided seed capital to two of these. Sonata in Allahabad which serves 100,000 clients and Mimo in Uttarakhand with 35,000 clients.
Prasad says: “In an ideal world, we should not exist. The banks should have been lending. But would anyone question a nationalised bank why it made profits while lending to the poor?’’ he asks.
According to a study by NGO Sa-Dhan, 80 per cent of the borrowings by MFIs are commercial, that is, taken from banks. They are not grants or subsidised funds.
Lok Capital is another venture capital fund set up in 2004. The fund has in its kitty four investments in MFIs, amounting to as much as $4 million.
Spandana, Janalakshmi and Satin Credit Care in Delhi are some of the MFIs which have benefited from its funds.
Lok Capital CEO Vishal Mehta says it is not true that MFIs are diverting from their mission of serving the poor. In fact, the mission is more financial inclusion rather than serving the poor, he says.
He adds the core mission of MFIs is educating clients about the products. As for exploitation and high interest rates, he says that microfinance is a self-balancing sector and there is so much competition that fleecing clients is not viable.
He denies that venture funds make microfinance more expensive. “On the contrary, we are trying to reduce cost and increase margins by introducing better delivery methods,’’ he says.
Sa-Dhan Director Mathew Titus says that Indian MFIs have so far kept their interest rates around 15 per cent, while their transaction cost has been about 6 per cent.
The other venture funds which have been investing in MFIs in India include Sequoia Capital and Unitus. The two firms’ combined investment in SKS Microfinance is Rs 50 crore. Lok Capital has invested Rs 17.45 crore in four MFIs so far. Bell wether has given out funding to the extent of Rs 60 crore.
For Chennai-based MFI Equitas, which has the fourth-largest equity capital of Rs 70 crore, the main funder has been Aavishkar.