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Sequoia Capital, an early backer of Google and Yahoo, has stepped beyond the realm of high-technology with a foray into Indian villages.

The Silicon Valley venture capital firm recently unveiled a $11.5m investment in SKS Microfinance, which is in the business of making small loans to the poor in amounts starting typically at less than $100.

The move marks growing investor interest in the potential financial returns of microfinance, rather than charity. Others are also joining in. Unitus Equity Fund, based in Washington state, invested in SKS last year and recently closed a $23.4m fund devoted to microfinance institutions in Asia and Latin America.

Partners in UEF, the largest global microfinance equity fund financed solely with private capital, include Omidyar Network, the investment firm of eBay founder Pierre Omidyar, and the clients of US wealth management firms Abacus Wealth Partners and Kensington Investments.

Microfinance borrowers use their loans for income-generating businesses, to buy seeds or chickens, for example, which in turn help them break the cycle of poverty. About 80 per cent of India’s population of 1.1bn does not have access to banks.

Investors are keenly aware of microfinance as a growing distribution network across the large base at the bottom of India’s socioeconomic pyramid.

Geoff Woolley, UEF board chair, said microfinance was one way to tap “rapid growth that will result when the poor gain access to more and more economic opportunity”.

In the past few years, large banks such as ABN Amro and Standard Chartered have accelerated the supply of loan capital to microfinance institutions across India. And now venture capital and private equity firms such as Sequoia and UEF are stepping in to help microfinance groups scale up.

Investors are attracted to high microfinance loan repayment rates of about 98 per cent and the huge potential in India’s large population of “unbanked” poor.

Like other fast-growing microfinance groups, SKS has built a wide network in India’s rural areas. The Hyderabad-based group has worked with almost 600,000 women borrowers in 7,200 villages in 11 states of India.

SKS has set ambitious targets of offering financial services to 5m poor families by 2010 with help from the new capital. SKS opens 30 branches and adds 60,000 members a month.

Mr Woolley added: “As time progresses, [microfinance] groups will become a conduit of additional products and services to the developing world populations.”

UEF is encouraging the development of new financial services, such as savings and insurance. While exit strategies for the microfinance industry are still unproven, there is talk of potential initial public offerings or acquisitions by larger financial services or consumer goods companies if microfinance groups continue to expand.

Since last year’s launch UEF has invested in: SKS Microfinance; Ujjivan Financial Services, a microfinance institution focused on India’s urban poor; and Credex, a microfinance institution in Mexico. UEF expects to make five additional investments this year.

Mohit Bhatnagar, operating partner of Sequoia Capital India, said microfinance was “an enterprise that not only makes economic sense but also helps empower the people across our nation”.

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