Keya Sarkar: Many openings in micro finance

OUT OF FOCUS

It was not very long ago that micro finance organisations had to worry as much about raising money as about disbursing them. But for good micro finance companies, in fact even start-ups with credible managerial teams, things may be changing.

Not only are the new private sector banks and the foreign banks competing with each other to fund micro finance institutions (MFIs), now MFIs may even have access to equity.

Social venture capital funds, which had been surveying and accessing the Indian market till recently, have now started investing: The Bellwether Fund, for instance, funded by the Gray Ghost Microfinance Fund, US; the Hivos Triodos Fund Foundation of the Netherlands; Caspian Advisors, India; and Arun Duggal, former Bank of America executive, who is also overseeing operations.

Started with an initial kitty of $10 million, it has already funded three start-ups. Although the Fund, as a philosophy, would like to be only minority shareholders, the fact that Indian co-investors are not available (thanks to the current stipulation of a minimum half million dollars in equity for NBFCs) has pushed it to take up 80 per cent of equity in start-ups.

But Bellwether has taken majority stakes in companies, as SV Prasad, CEO, Bellwether Fund, explains, which are outside the four southern states. With intense competition even in the micro finance sector in the south, it would take very long for start-ups to make a headway.

Bellwether has therefore chosen to fund start-ups in West Bengal (the most densely populated state with a population density of 904 persons per square km against the national average of 324 in 2001), and Uttar Pradesh, which has only one MFI in the entire state.

Besides start-ups, Bellwether will also fund high-potential NGOs to transform into NBFCs. In fact, Unitus, a US-headquartered venture fund, is taking this route. Unitus, which is reported to already have a $10-million exposure in India, is identifying NGOs engaged in microfinance activity and speeding up their growth through grants, capacity-building consulting, and capital investments.

Very recently, ACCION International, another micro financier with a global presence, has announced that in India it will forge a partnership with Unitus. Together, Unitus and ACCION propose to reach an impressive 15 million households in the next ten years.

In addition to start-ups and NGOs, the other investee companies that Bellwether is hoping to look at are existing NBFCs with large personal finance portfolios.

The strategy with these companies would be to convince them (by underwriting the risk in some manner) to actually "downscale", so to say, and look at lending to the poor for both consumption purposes as well as for livelihood finance.

While the potential may be huge and the demand large, venture funds which have taken the plunge to fund MFIs in India are definitely a brave lot.

Crossing the first hurdle of registering the start-ups or even the NGO converts may prove quite a task, with NBFC registration currently taking anywhere from three to six months. The central bank's "hate" rather than "love" relationship with NBFCs is legion and the RBI is extremely cautious about new NBFC registrations.

But with Finance Minister Chidambaram making the right noises on microfinance, the RBI may clear NBFC applications which propose to work in micro finance a trifle faster than in the past.

Return expectations of social venture funds are understandably modest, with fund managers having social development as internal performance criteria. But a 15 per cent return per annum is what venture funds in the microfinance sector hope for, if there are no really bad investment decisions. However, for this Prasad feels the wait could be a minimum of three to four years.

Exit options for find managers like Prasad are of course very much there. Theoretically an IPO is possible. But neither in India, nor maybe in the world are there examples of IPOs by MFIs. What is most probable is consolidation of small MFIs and subsequent acquisition by large NBFCs or banks.

While all this may seem far-fetched to those working in the MFI sector currently, going by the rapid strides in the last two years, early investors like Bellwether or Unitus may gain significantly for being early risk takers.

Finally, what the micro finance sector can hope for is that nationalised banks (which together have a reach unmatched by any other in the world) wake up to the potential of micro financing. Currently, they seem to be spending energies advising the RBI to block others who wish to progress fast.

The argument is that the nationalised banks already have an infrastructure and reach and there seems little need to create parallel ones. But infrastructure is only a means to an end.

The end sadly in this case is that loans to small borrowers are not increasing and small savers are finding it more and more difficult to access mainstream banking services.