Founded in 2004, Lok Capital has deployed over $300 million in 40 companies across microfinance, fintech, SME finance, housing finance, small finance banks, insurance, health-tech, ed-tech, agri-tech, and climate-tech sectors. We have also mobilised over $300 million from our shareholders during this period as co-investments in these companies. We have just raised a new fund of $150 million to deploy in companies in India, which have a demonstrated business traction and a strong orientation towards Impact. While we continue to be a very active investor in the Impact space in India, since 2014, we have not made any new investment in microfinance. We believe the sector is maturing and growth levels are slowing as expected with any sector which is reaching maturity.   

Early investors in microfinance made upwards of 3-4x return on their investments investing in early-stage MFIs and taking the risk. Today, there is very little white space for MFIs to grow and not attractive for an investor like Lok. It is attractive for large investors who may want to roll up a few mid-sized MFIs and list them.   

How has the segment changed? 

The microfinance industry continues to play an important role in meeting the liquidity demands for poorer segments of the population in the country. Earlier, it used to help small businesswomen with their tailoring/flower and other similar businesses, especially in meeting the cash flow requirements and working capital. Today, in addition to helping the businesses, it is also helping as a cash flow smoothening tool, especially to help pay fees for the children or for family events and festivals. Earlier, it used to take 15-20 days to get a microfinance loan. Today, with much better utilisation of data and technology, the loans are disbursed in 2-3 days.

Similarly, the ticket sizes have kept pace with inflation, and is continuing to be an important tool. As an investor, the biggest difference we see today is that pretty much all eligible customers are served by microfinance lenders and, hence, we see very little white space. The filling of white space has been possible because of an excellent regulatory and policy environment, combined with strong support from banks, investors, and other financial institutions. 

Organic growth opportunities in group lending models are getting limited, and there is a lot of churn in the customer base, going from one lender to the other and the portfolio growth rates have slowed down. Pushing growth further may lead to over-burdening the borrower, thereby increasing risk.Excessive liquidity in the market in the last five years has fuelled a very large entrepreneurship wave in the country, but this has also resulted in an environment of lax governance, particularly in many of the new age companies. In these companies, some of the areas which we are watchful of include related party transactions, conflict management, poor internal financial controls, and poor internal audit mechanisms. We are working on strengthening these. We are insisting on tighter board processes, independent directors, high-quality statutory and internal auditors, and CFOs upfront in the investment process. 

The MFI space is also evolving. Many of the SFBs are developing newer individual loan products for their erstwhile group lending borrowers, the cream of their group loan borrowers. The SFBs are offering other asset-backed loans to a small percentage of their 4th or 5th cycle borrowers. This can further help SFBs grow their book, while maintaining credit quality. Overall, this is good for the borrower base and the country, as more and more families from the lower-income segments are graduating to be truly financially included.