Bangalore: Earlier in March, Bangalore-based microfinance institution (MFI) Janalakshmi Financial Services named Narayan Ramachandran to its board after the former Morgan Stanley India head took a minority stake in the firm.
It’s not usual for individuals in India to invest in micro-credit firms because of the high risk involved in lending to the poor. But the industry’s robust growth projection is beginning to make a few rich investors like Ramachandran more confident about it.
“MFIs as an investment opportunity are getting better-known only now... I see more and more people coming in. It’s still a trickle but at least a trickle is there,” said Ramachandran. “What can be bigger than to become a part of financial inclusion with the desire to make a social impact?”
Risky avenue: N. Ramachandran of Janalakshmi Financial. Hemant Mishra / Mint
Wealth managers point to other factors.
MFIs are likely to turn in “slightly higher returns than average returns,” said Kunj Bansal, chief investment officer at Sanlam Investment Management, which is seeing 5-10% of its clientele enquiring about opportunities in MFIs. “At company levels, the returns are 25-30%. These are higher than any other standardized investments.”
Besides, most other investment products have become passé and MFIs offer novelty and a means to diversify the portfolio, he said.
Individuals are open to investing 5-10% of their corpus in MFIs for stakes of not more than 3%, said Bansal. Many of these individuals are senior professionals, industrialists and corporate honchos keen to invest Rs50 lakh to Rs2 crore and seeking returns of 20-30%, similar to expectations from private equity firms.
For micro-credit lenders, this new interest from rich individuals widens their access to home-grown capital, which has been a challenge, say wealth managers. Most MFIs depend heavily on bank loans or investments from mostly global private equity firms.
According to the Union finance ministry, the current available credit for the poor is about Rs20,000 crore, less than one-tenth of the Rs2.4 trillion that is required.
“The sector still has growth potential of 10-15 times over the next few years,” Vineet Rai, chief executive at social investor Aavishkaar, said in a recent interview. The firm invests in MFIs through a dedicated fund, Aavishkaar Goodwell India Microfinance Development Co. Ltd.
“It took time for domestic investors to understand this market. There is enough opportunity to fund this sector,” said Royston Braganza, chief executive of Grameen Capital India Ltd, which recently facilitated a combined investment of Rs2 crore in an MFI from two individuals. It is now working on a second deal.
Braganza said the number of individual investors in MFIs can only rise given the number of billionaires in the country. India is home to 49 billionaires, according to Forbes magazine’s latest annual list of the world’s richest people.
Wealth managers say small MFIs that have been active in the past three-four years would be ideal for individual investors. Aware of the risks involved in MFIs, such as liquidity crunch and the high potential for bad debts, these investors seek the track record of the MFIs and observe due diligence on a par with institutional investors, they said.
Some MFIs aren’t too enthused by the trend. The lenders say that while it’s good to have more sources of capital, too many individual investors could become cumbersome for the promoters. Also, unlike institutional investors who have an exit horizon of five-seven years, individuals are more comfortable with a shorter period, at times just two years.
“We like investors with at least five years of investment period,” said Baskar Babu, chief executive of Pune-based Suryoday Micro Finance Pvt. Ltd, which has rejected individual investors approaching the firm. “When you deal with individual investors you can’t be sure how the board would end up looking like,” he said.
It’s a gold rush, said Rajesh Saluja, chief executive, ASK Wealth Advisors Pvt. Ltd, cautioning that the trend can’t last for long because of the inherent risks involved in the MFI business and possible regulatory changes that could forever alter how the industry works.
“A cap on lending rates and business correspondents can change this business and it may not offer the attractive returns it’s offering now,” he said.