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The microfinance institutions are disappearing on the radar of private investment players due to a sharp fall in the return on equity.
This was due to loss of business and mounting non-performing assets in Andhra Pradesh which also impacted the investment climate in general in all States, say experts.
“The sector is not at all attractive unlike a year ago. The return on equity is now in the range of 16-18 per cent compared to up to 45-48 per cent earlier,'' Mr Vishal Mehta, Co-founder and Partner of Lok Capital, a venture capital firm which has investments in some MFIs including Basix and Ujjivan Financial Services.
The scope in MFIs, hence, is only in social investment but not economic investment, feel experts in PE firms and venture capital entities.
“There is still interest from private social investors,” said Mr Samit Ghosh, Managing Director, Ujjivan Financial Services.
The key criteria for PE investments are future profitability of the MFIs in view of the interest rate cap and margin cap besides an ability to operate within that environment viably, he added.
The Microfinance Institutions Network has been maintaining that political risk exists for MFIs even outside AP in the absence of a central law, which looks uncertain, said a partner of a PE fund that invested in a Hyderabad-based large micro-lender.
Apparently, this is holding back some decisions. “A few investors who are open to funding this cash-strapped sector are taking a long time to decide and are not willing to make huge investments,'' Mr Suresh Krishna, Managing Director, Bangalore-based Grameen Koota, said.
According to Macquarie, the pain for microfinance sector is not yet over. “We had a brief conversation with SKS management and also with some banks and other agencies to get a brief update on microfinance. The key conclusion was that though regulatory framework at the margin is expected to be favourable, on the ground the situation doesn't seem to have improved and funding for microfinance companies continues to be a huge challenge,” said analysts of Macquarie in research report.
According to Ms Vijayalakshmi Das, Managing Director, Ananya – Finance for Inclusive Growth, the private equity players are mostly interested in MFIs working outside AP and were awaiting a central act.
The microfinance sector was a darling of PE players both from India and abroad till October last year and made significant investments in the then leading MFIs such as SKS, Spandana, Share and Basix, among others.
The total portfolio of MFIs was at Rs 33,000 crore during last year.
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