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Over the past few years microfinance in India has morphed rapidly from
a charitable endeavor to a profitable business and then to flavour of
the month for private equity investors and venture capitalists.
The buzz around microfinance grew in 2007 when Sequoia, the venture
capital firm that backed Google and Apple, invested $11m (£7.6m,
€8m) in SKS, one of India’s largest microfinance institutions (MFI).
But since the global financial crisis deepened last year, the buzz around
microfinance has quieted. What is in store for microfinance in India?
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delinquencies in the last five years,” says Moumita Sen Sarma, head of
microfinance at ABN-Amro in India, referring to the bank’s portfolio.
“We are trying to grapple with other issues but our commitment to
microfinance is still strong.”
However, MFIs are hurting as overall liquidity from banks dries up.
Commercial banks supply money to MFIs, which then use their
grassroots networks to distribute small loans to customers mainly in
rural India.
India’s largest MFIs are better able to weather the storm. Big banks
prioritise lending to those established players, which still attract some
interest from investors.
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Previously the largest deal was a $37m investment in SKS in late 2007
by a group that included Sequoia, Silicon Valley Bank and Vinod Khosla,
founder of Sun Microsystems.
Although the largest MFIs are more insulated from the impact of the
financial crisis, dozens of smaller MFIs have been dealt a stinging blow.
Banks tend to fund the big players while ignoring fledgling MFIs,
resulting in slower growth rates.
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A global survey of MFIs and investors released this month by
Microfinance Insights, a Mumbai-based magazine, found that more than
25 per cent of non-deposit taking MFIs decreased their lending in the
last 12 months while 20 per cent cut staff. Thirty-seven per cent
revised growth projections downward. Nevertheless, more than four
out of five investors have not reduced their portfolio allocation towards
MFIs.
In India, MFIs face better prospects for improved liquidity. Indian law
mandates that government banks must allocate 40 per cent of
financing to “priority sector lending”, which includes microfinance as
well as agriculture, small businesses and other neglected sectors.
There may also be silver lining in slower growth. Many experts had
feared that microfinance in India was overheating as MFIs sought over-
ambitious growth targets. Some accused the sector of drifting away
from its original mission of helping the poor in order to increase profits
and attract investors.
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