In the second major investment by a foreign investor in an Indian microfinance firm, Legatum Capital, a Dubai-based privately-owned finance firm, committed a $25 million (Rs125 crore) investment in Share Microfin Ltd, a Hyderabad-based microfinance institution which is India’s largest.
Recently, Sequoia Capital, one of the largest venture capital firms in the world, led a consortium that invested $11.5 million in SKS Microfinance, India’s second-largest microfinance firm.
Other firms, such as the Uttar Pradesh-based Cashpor, have seen smaller investments coming in—in Cashpor’s case from Grameen Foundation and Silicon Valley venture capitalist Vinod Khosla who invested $500,000 in November 2005. Microfinance is the business of lending tiny loans to people who usually have no access to credit.
The $25 million investment makes Legatum the majority shareholder with over 51% stake in Share. Simultaneously, another investor, Avishkaar Goodwell India, invested $2 million in Share. The combined capital infusion, $27 million, makes this the largest such deal in the Indian microfinance sector.
Share has over one million clients and $95 million of outstanding loans. It plans to reach out to another five million clients and build a loan portfolio of $600 millionby 2012.
Share is also planning to float an initial public offering in the next three to four years. Ahead of that, it will issue bonds in order to meet its resoruce needs, said Udaia Kumar, chairman and managing director, Share.
“Equity infusions such as these increase the debt-taking capacity of a microfinance institution. With a strong capital base, we can leverage up to 10 times our capacity and get better loan rates from commercial banks. This gives us the financial muscle to reach out to more people and offer them access to low-cost financial services,” Kumar added.
Traditionally, microfinance institutions can leverage up to five-six times their equity. They borrow from commercial banks and in turn lend them to small groups of borrowers.
About 600 million Indians do not have access to formal bank credit. Public-sector banks, that account for three-fourth of the Indian banking industry, have been offering loans to self-help groups under the directed lending regulations of the government.
Under the Indian central bank’s financial inclusion programme, banks have started looking at the rural unbanked population. They see this as an opportunity to make profits as urban Indians are increasingly becoming overexposed to bank credit. Banks are also exploring various partnership models with microfinance institutions. Recently, SKS Microfinance and Citibank announced a Rs180 crore financing programme where Citibank India purchases loans that are ‘originated’ by SKS (it means that SKS lends the money and then transfers the loan or asset to Citibank).
The highlight of the Citi-SKS agreement is that each individual loan originated by SKS is purchased by Citibank, which shares credit risk in the transaction.
Legatum, which has a foreign institutional investor sub- account registered with India’s stock market regulator Sebi, has investments of over $1 billion in India. Its FII, Crown Capital, owns close to 5% each in ICICI Bank, HDFC, HDFC Bank, UTI Bank and Indiabulls Financial Services.
This, however, is the firm’s first foray into the microfinance space. “We are committed to social development through Legatum Global Development that promotes global prosperity by using market-based solutions to solve long term development. We chose India as a destination among all other markets, because we feel that there is a huge untapped opportunity in providing even the basic financial needs to the rural poor in India,” said Mark Stoleson, president, Legatum Capital.