It is exam day for five women in a village near Sangareddi, about two hours drive from the southern Indian city of Hyderabad. On a warm autumn day, they sit in a circle on the ground as a local manager from SKS, a Hyderabad-based micro-finance company, drills them on loan fees, interest rates and repayment schedules.
The manager uses pebble-like seeds as counting tools and sits next to the SKS loan officer who has trained the women for weeks. The officer must keep silent as her pupils try to pass this final test that will allow them to begin receiving small loans starting at less than $100.
One might think such maths calculations would be challenging for these women who have only fourth-grade educations. But in their hand-to-mouth existences where every rupee counts, they are already versed in tallying prices and interest rates.
For 30-year-old Laxmi, an illiterate agricultural worker who makes about Rs25 (55 cents) a day, the hardest part of preparing for the test was learning to write her name – a requirement for signing the passbook that she will receive. She hopes to use her first loan to buy a buffalo.
Large banks are increasingly viewing microfinance as serious business rather than altruistic works and are providing loan capital to groups such as SKS. And now venture capital firms are taking equity stakes in microfinance groups to take them to the next level.
Investors are attracted to high loan repayment rates of about 98 per cent and the enormous market potential in India’s large population of “unbanked” poor. About 80 per cent of India’s 75m very poor households lack access to basic financial services.
In a sign of keen interest in the sector, ICICI, India’s largest private sector bank, has grown its microfinance loan portfolio from $15m four years ago to more than $350m today. ABN Amro’s microfinance loan portfolio in India, launched in 2004, stands at about $27m.
In the past three or four years, big banks have begun to provide third-party microfinance groups with loan capital that they then distribute to poor clients through local networks of rural offices.
“We don’t look at micro-finance as a social obligation but a business strategy,” says Brahmanand Hegde, joint managing director of ICICI.
These loans are used for a variety of income-generating activities such as selling vegetables or buffalo milk. Larger loans can be used to buy equipment such as fishing nets or a refrigerator to store fish.
This is a significant development for the rural poor. Previously their only means of borrowing was often through local loan sharks.
Citigroup has contributed to microfinance in India through its charitable foundation for several years. But two years ago, the world’s largest financial services group launched an urban microfinance pilot programme in Hyderabad in collaboration with Basix, one of India’s largest microfinance companies. Most micro-finance programmes focus on the rural poor but cities, with their swelling numbers of migrant poor, are attracting increasing interest.
Citigroup would not disclose the size of its micro-finance portfolio. The bank has developed a biometric ATM designed for poor city dwellers that could help relieve loan officers from manually collecting loans and managing accounts, as is the norm in microfinance.
A few US, European and Indian venture capital groups such as Bellwether of India, Unitus of the US and Goodwell of the Netherlands are gearing up to make equity investments in Indian microfinance institutions.
A $12m fund raised by the private equity arm of Unitus, a non-profit organisation based near Seattle, has invested $470,000 so far in SKS and $275,000 in
Bangalore-based Ujjivan. Unitus expects to make about half a dozen more equity investments in India over the next five to seven years.
Unitus is already in partnership with several Indian microfinance groups by supporting them on capital raising and capacity-building.
“On the debt side, banks have stepped up, so that’s not a problem,” said Sandeep Farias, country director of Unitus India, based in Bangalore.
The equity investments focus on building the balance sheets of microfinance companies and turning them into professional businesses.
Better governance, transparency, technology and management are critical in developing India’s leading microfinance companies. SKS, for instance, counts almost 320,000 women clients in 11 states in India but aims to reach 700,000 customers by March.
“How do you ensure you have good quality growth where the institution doesn’t collapse?” asks Sandeep Farias, country director of Unitus India. “It needs to be about a managed company.”
Goodwell, a Dutch investment fund that has a partnership with Aavishkaar, an Indian microventure capital firm, is raising $10m. Like Unitus, it envisions nurturing existing microfinance companies. It aims to create new ones through “franchising” by providing institutional structures, procedures, training and funding.
Goodwell partner Wim van der Beek points out that if microfinance becomes part of mainstream finance, companies outside the banking sector could be interested in taking a stake.
“A huge problem for getting at the base of the pyramid is finding solid distribution channels. The beauty of microfinance is that it is essentially a distribution channel,” Mr van der Beek said. “I would not be surprised if we saw corporate buyers down the road.”