I am reproducing this article verbatim for those who are not avid readers of TOI and also for those of my friends who are not directly related to the development sector.
Source:TIMES NEWS NETWORK
Great ideas often spawn in the most terrible circumstances. One such idea is microfinance, often credited to last year’s Nobel prize winner Mohammad Yunus, who founded the immensely successful Grameen Bank of Bangladesh.
Yunus began by giving a micro-loan of $27 to 42 impoverished families after witnessing the horrors of the great Bengal famine. But the idea, which was inspired by misery and depends on the poor, ironically, is attracting savvy, super-rich investors.
“Microfinance is now sexy,” says Vikram Akula of SKS Microfinance, which has just received $11.5 million from private equity funds Sequoia Capital, Unitus Equity Fund, Odyssey Capital, SIDBI and venture capitalists Vinod Khosla and Ravi Reddy.
Khosla had earlier invested in Varanasi-based Cashpore. That profit-seeking capital is flowing towards microfinance institutions (MFIs) suggests that the sector is gradually growing out of its fledgling age.
“Capitalisation was the first bottleneck in the development of microfinance. Now it is not,”says Brahmanand Hegde, joint general manager, rural and micro banking group of ICICI Bank, which has lent Rs 4,500 crore to MFIs over the past three years.
Still, Hegde estimates that the sector needs about $5-6 billion of pure equity capital.
There is good reason why private pools of money, which are always on the lookout for ways to maximise returns, are showing interest in Indian MFIs. Many of them have built up a strong client base.
The big few have captive clientele of at least half a million. There are 49 MFIs that have a client base of over one lakh.
MFIs like SKS and Spandana, who follow the Grameen model to the T, are helping rural households to rise from grinding poverty by encouraging entrepreneurship. There repayment rates are near 100%, better than any bank in India. And they are slowly breaking even.
“We see microfinance firms generating huge cash flows from different channels. MFIs can create potential customers as they upgrade them into micro and small-scale entrepreneurs. That will generate demand for various financial and commercial products,” says Mohit Bhatnagar of Sequoia Capital.
Akula says that some of the small businesses generate huge returns on capital invested. For example, micro diners SKS lent to made returns of as much as 246% and pottery as much as 236%.
Even vegetable vending generated returns of 57%. As the clients’ financial condition improves, they become potential customers for other products such as insurance or a cell phone.
At that stage, MFIs can tie up with insurers or telephone companies to sell products to their loyal base, which in turn will earn the company commissions boosting profits.
“In the Grameen methodolgy, once you break even, you grow fast and become very profitable,”says Vijay Mahajan, who founded Basix, the country’s first MFI born with a corporate structure. Basix was also the first to attract foreign investment when IFC, Washington, the private funding arm of the World Bank, Triodos Bank of Holland and Shore Bank of the US together invested $1.5 million in 2000.
“The investors in this sectors are typically patient investors — willing to wait for seven or 10 years. But they know that ultimately there will be profit,”says Mahajan.
