Microfinance on radar

PRIVATE EQUITY WATCH

Private Equity (PE) funds, which are known to sense big opportunities in businesses, now see a potential in low-profile microfinance institutions (MFI).

Recent times have seen a clutch of deals in the MFI space involving PE funds. JM Financial India Fund "� a $225 million PE fund sponsored by JM Financial "� Old Lane Partners and Delhi-based Lok Capital "� a Mauritius-based microfinance venture capital fund "� together have invested $12 million in Spandana, a leading MFI.

In May, Dubai-based Legatum pumped in Rs 100 crore ($24.76 million) for a majority stake in Share Microfin, an MFI based in Hyderabad.

The Silicon Valley-based venture capital fund, Sequoia Capital, invested $11.5 million in SKS Microfinance recently and Rajiv Lall's Lok Capital, which had made its first investment into Janalakshmi, an MFI-specific fund, plans to grow its $12 million fund to $20 million by the end of this year.

Industry players say there is a huge potential for MFIs to grow, given that there are about 30 crore bank account holders and there are still another 30-40 crore, who do not even have a bank account. They say PE players are seeing a huge growth potential that is yet to be tapped.

"MFI is a growth story that is still an untapped segment in India. We are seeing lending by companies to urban and rural people in a profitable manner, where banks are unable to reach, these MFIs can reach. It's the fastest-growing segment in the Indian economy. It's a niche market opportunity," said Dilip Kothari, the founding managing director of JM Financial India Fund.

The investments will help Spandana provide diversified financial services to lower-income clients as well as diversify its product portfolio and geographical reach across India. "We are planning to invest more money into Spandana to fund its acquisition plans," he added.

"Finally, we are seeing commercial capital being put into the hands of the poor people. Certainly, we will see much more PE investments in the space. PE interest into the MFI segment proves that you can run a very viable business working with poor people," said Vikram Akula, CEO and founder, SKS Microfinance.

"There will be another round of $30 million deal in another couple of months in our company. These investments help MFIs to become more professional and transparent," he added.

Industry players said till recently everybody was willing to lend to these segments, but none was willing to invest in these MFI companies.

"Microfinance institutions need hand-holding to deepen their relationship with the banks and in understanding the compliance in running these institutions and also what are the systems they need to put in place to scale up the MF operations," said Vishal Mehta, general manager, Lok Advisory Services.

"There are few MFIs that can receive PE investments in them. PEs will contribute to corporate governance, they also will get a board seat," said Padmaja Reddy, founder and MD of Spandana.