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Investeurs Chronicles
INSIDE
• Current Chronicles
• Cover Story – Micro
Finance
• Open Forum – Multi
Dimensional
Bilateral Relationship
• Emerging Markets
• Outlook – Gold
• Financial Q
• In Focus – Dilma
Rousseff
o
v
Newspapers are buzzing with such reports, MFIs' business model of high interest rates,
which were not thought of half a decade back. and near-zero defaults have drawn investors
e
Proponents of microfinance must have never from around the world. This coupled with a
envisaged crossing paths with equity wide client base, both existing & future,
r
investments. But, of late, that has become turns it in to a virtual goldmine for the
order of the day (see box at end of the article) investors. No wonder then, that, Singapore’s
S
Private equity investments in this domain Temasek, CLSA Capital and International
have been of $230 million in the past two Financial Corp to private equity firms
t “MicroVentures India, a private years, & future looks even more promising. Sandstone Capital, Unitus and Matrix, has
equity fund that invests in Indian microfinance institutions (MFIs) have placed their bets on Indian microfinance
o microfinance institutions (MFIs), reportedly attracted private equity investment companies, as, SKS, Share Microfin,
recently loaned INR 30 million totaling INR 3.86 billion (USD 84 million) Spandana, Ujjivan among others. Further
r (approximately USD 680,000) to between January and June of this year – an there has been a surge in the number of
Indian MFI Swadhaar Finserve.” increase of approximately 15 percent over the microfinance focused funds like the Lok
y
first half of 2009. Such massive investment in Capital Group, Bellwether Microfinance Fund
a socially oriented sector like microfinance and Aavishkaar Goodwell, among others.
forces one to wonder if this has become a These funds are dedicated to investing in the
Bhartiya Samruddhi Finance business of generating gains on the back of equity of Microfinance Institutions (MFIs) in
MFIs have emerged as an investment hot spot previously unbanked individuals to efficiently to drift from original goal of MFIs: lending to
for Private Equity (PE) due to its rapid growth access deposit accounts, government disbursals, marginalized sections of society. As bigger loan
and high returns, growing at a Compound insurance products, and even secure payment sizes tend to reduce transaction costs, lending
Annual Growth Rate (CAGR) of 105 per cent in platforms have been launched as a direct result of policies may lead to targeting of more well-off
the last five years. investor support. PE investments, also, serve to segments of the population who can service
The sector covers 100 million people strengthen balance sheets, demand better bigger loans, thereby, defeating the very
worldwide with a total loan portfolio in excess corporate governance practices, thereby, resulting purpose of microcredit.
of US$40bn. Initially, growth has been on the in stronger organizations. We have examples of the
The other disquiet is slightly opposite to the
back of the traditional funding sources, like constructive role played by private equity in other
first one. PE fund inflow induced aggressive
grants & donations, but had it not been for sectors. From technology to telecommunications to
lending i.e. too much micro credit may lead to
commercial capital participation, portfolio more recent, clean technology, PE investments
over-indebtedness of borrowers, and eventual
escalation would not have been this massive. have contributed handsomely to overall
trapping in to a vicious circle of new loans for
Rapid growth demands higher investments. productivity of various emerging sectors.
servicing older ones. This came in to lime light
Donation driven & bank led capital sources are In nut shell, private equity brings along scalability,
when numerous suicides were reported in
unable to meet investment requirements of an accountability & transparency in operations.
Andhra Pradesh.
industry growing at 75% per annum. Over the Where does the poor figures?
Now, where?
past two years, the five largest MFIs in the In such a win-win scenario for both MFIs, & PE
country have been the beneficiaries of players, one often forgets to factor in the real Concerns around private equity in microfinance
approximately US$180m in private equity drivers of the sector: the poor. What lies in there are valid, but, some levy should be attributed to
investment, which has helped them to grow for them to gain out of this relationship? the prudence of the investor. A default prone
their combined active client bases from 2.2 Advocates of PE investments talk of higher loan portfolio, no matter how large, is of no use.
million to over 4.7 million, a compound investment in technology, and superior This ensures that the interests of private capital
annual growth rate of 45%. Four of these competition amongst for-profit MFIs due to are aligned with those of the recipients of MFI
organizations are now serving well over a increasing participation of private capital which credit - both parties benefit from growing a
million active clients each. Private equity is no will result in lower interest rates, a higher quality quality loan portfolio, promoting greater
longer option, but, rule of the game. of service, and a greater diversity of products. operational efficiencies and technological
Then there are additional advantages of Positive impacts of PE investments are aplenty, but sophistication, and ultimately from accessing
private equity investments too. Numerous new so are its pitfalls. Biggest concern is about the public capital markets. These benefits all serve
business models, like, the branchless banking expectations of extraordinary growth rates by the to lower the operating costs of the MFI,
technologies currently enabling millions of investor. Many fear that this will eventually lead therefore resulting in a lower cost of capital and
Cover Story “Private Equity in Micro Finance”
complex interplay of a variety of factors — guesstimate of the intensity and importance of from information pertaining to tourism
historical, geographic, political, economic, the bilateral relationship between various data, migrant population, number of front-
cultural, strategic and so on. Governments countries based on this simple formula. It is page stories in print media, or minutes of
operate within given circumstances and it takes a possible to undertake a more sophisticated and television time devoted to news from that
lot of political energy on the part of any head of quantitatively satisfying exercise by trying to country, popularity of cuisine and culture,
government to alter the nature of a bilateral measure each component in terms of some interaction in sports and so on. In a
relationship based purely on government-to- broad indicators, the way the UNDP’s Human democracy, the media’s view of other
government interaction and relations. Development Report estimates the Human countries is shaped by all the three
Indeed, as Prime Minister Manmohan Singh told a Development Index by using proxies for health, variables, that are P, B and G, and the
meeting of the US-India Business Council in education and livelihood status of people. media, in turn, shapes thinking at all three
November 2009, “In today’s economically levels.
integrated world, economic relationships are the
bedrock on which social, cultural and political BILATERAL RELATIONSHIP INDEX (BRI)
relationships are built. A strategic relationship
Country P2P B2B G2G C2C
that is not underpinned by a strong economic
relationship is unlikely to prosper. On the other United States 5 4 3 12