Global Equities Bullish on Investment in Indian Microfinance amid some Concerns

Microfinance Focus, June 23, 2010: Bullish sentiments dominated the session on ‘Perspective from the marketplace’ at MCCM where leading international investors discussed the future investments of worldwide equities in Indian microfinance. Speaking of the industry which remained buoyant despite a global downturn, investors expressed their high optimism about the future influx of equity investments in the sector.

Riding high on its 100 percent year-on-year growth, microfinance in India accounted 40 percent of all Private Equity deals last year. There were 11 PE deals worth $178 million during the financial year 2009, compared to just three deals worth $52 million in 2008 and the trend continues. Earlier this year, the market reported to have 24 specialized microfinance equity funds with assets under management totalling US$1.5 billion. Banking on its astounding performance, investors from across the globe are showing keen interest for investing in this promising space. 

Paul Beckett, South Asia Bureau Chief, The Wall Street Journal, spoke of the relevance of press for the microfinance industry. “Reputational risk is massive under representative factor. If it goes wrong, regulators over react, politicians over react and you’ll be in a tough spot” he said. For mitigating these risks, he added, “You should know who are dealing with you; you should know the top five journalists who are covering microfinance. However many business plans are floating there, you need to communicate it to people”.

Monica Brand of ACCION supported Mr. Paul’s opinion saying, “Microfinance have not yet considered the press as the significant facilitator of the industry’s image.” Speaking about her outlook on Indian microfinance she said, “India plays prominently because it is a prominent market and there have been experimentations on technology and the likes. But the bubble experienced here is very much like the dot-com bubble of the 90′s, and she doubts that the high PE ratios are truly justifiable.” 

Discussing the current landscape of investment in India, Mohit Bhatnagar, of Sequoia said, “The early and easy days of simple acquisitions are gone. The products need to be more sophisticated now”. He supported the growing efforts of MFIs to improve their governance saying, “MFIN is a brilliant idea, and investors look forward to such improving regulations that structure the industry.” Further he added, “The strategic opportunity is the sheer distribution platform of being able to reach millions of people, and we have to be responsible about this. We need to give them the products and services that they deserve”.

Talking of some of the negatives the industry is facing, Ashish Lakhanpal of Kismet Capital stated. “Multiple borrowing leading to high default rates, and the proliferation of players in the same market, is making it over-saturated. Another concern is that we seem to focus more on scaling and growth than innovation. But innovation is what benefits the clients. It also benefits the institutions as they can come up with solution to tackle the financial problems that they might face”. “Regulatory concerns have also resulted from bad press. It lowers investors’ confidence, thus affecting the whole industry. On the other hand it leads to a review of the regulations that may be currently inadequate”, he added.

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