Keya Sarkar: Hope and despair in micro-finance

OUT OF FOCUS

These last few months have been marked by deals in the microfinance industry never witnessed before. With $12.5m into Spandana (of which $10m came from JM Financial), $11.5m in SKS Microfinance (majority from Silicon Valley-based Sequoia Capital) and a whopping $27m in Share (of which $25 m came from Dubai based Legatum Capital), suddenly all MFI CEOs seem to be talking about raising capital and doing it quick lest they miss the bus.

But in a nascent industry MFIs large enough (with disbursements of Rs 300-400 crore) to absorb such large doses of capital are few and far between. So while these are instances of the industry finally being able to access mainstream sources, the CEOs of most of the more modest-sized MFIs will have to continue to depend on fund sources which have targets in terms of the number of beneficiaries in addition to return on capital. Of these the more active have been the Hyderabad-headquartered Bellwether Microfinance Fund, Delhi-based Lok Capital and Unitus India based in Bangalore. Of course Nabard too has a dedicated MF equity fund, but its announcement of setting up an MFI itself has made many in the industry wary of a conflict of interest.

Of the MF industry-focused funds operating in India, Bellwether has probably been the most active, having invested over $8.6m across a dozen companies which had between themselves 265,489 customers at the end of March 2007. In terms of profile, half of these work in the rural areas and the remaining in urban areas. While six of those funded are start-ups, four were in NGOs which have been or are in the process of being transformed into for-profit MFIs and two are existing NBFCs.

Unitus India, which works with MFIs in what it calls a "partnership mode" (helping with grants, capacity building, etc) before investing in equity, has made three investments to date out of the 10 companies it has partnered. Unitus has put in two rounds of equity in SKS Finance (with which its association is over four years) and Bangalore-based Ujjivan Finance.

Lok Capital too has started off with investments in Spandana (along with JM) and in Janalakshmi Financial Services, having invested $3m of its $12m fund.

In order to find out whether there were any discernible trends in their experience of dealing with a dozen investments and whether there was any learning, I spoke to S V Prasad of Bellwether, Sandeep Farias of Unitus, and Vishal Mehta of Lok Capital.

One of the big realisations Bellwether had, according to Prasad, was that transforming NGOs into for-profit MFIs is hugely time-consuming. While the statutory requirements of changing the legal identity have a time cost certainly, what really was more time-consuming than planned was bringing about the change in attitude. Transforming accounting systems and human resource management in existing NGOs actually took 70 to 80 per cent of the time earmarked for these companies.

What came as a very pleasant surprise and was an absolute delight, according to Prasad, was the quality of people promoting MFI start-ups. The fact that people with valuable corporate experience are setting up MFIs is a trend unique to India. Elsewhere in the world MFIs continue to be started by either the government or NGOs. Prasad has reasons to be pleased because the five start-ups he funded have, with a maximum of 10 per cent variation, achieved their targets. Farias too echoes Prasad in talking about his experience with the start-up MFI Ujjivan. "The management team that is running Ujjivan is really a matter of pride," says Farias, underscoring how that is Unitus's chief criterion for investing in both SKS and Ujjivan and will remain so.

Mehta says that from his deals in the pipeline and the proposals that they get, it may be that MFIs working in the urban areas would proliferate. A lot, however, remains to be learnt on how the urban poor will behave and what impact it will have on MFIs. Start-up MFIs like Ujjivan or Arohan or even Janalakshmi would be important sources of data to understand how these MFIs will fare.

Although Prasad and his team did realise that in order to sustain healthy growth of their investee companies they would need to fund support companies focused on the MFI sector like software companies, credit bureaus or training institutes, they have not been lucky in finding such companies to support. "We will need to market ourselves better to promoters who are thinking of setting up such companies," admits Prasad.

The disappointment over the last eighteen months, according to both Prasad and Farias, is that despite dealing with a cross-section of companies in the MF space they have not come across much of product innovation. "Attempts at product innovation have at best been half-hearted," laments Prasad.

The other disappointment has to do with the policymakers. Despite a lot of discussion on the subject and mention of the sector in budget documents, on the ground not much had changed for MFIs or their clients.