Mumbai: Sequoia Capital, one of the largest US-based venture capital firms that is famed for making early-stage investments in Google, Yahoo and YouTube, is leading a $11.5 million (Rs50.6 crore) investment into SKS Microfinance Pvt. Ltd. Microfinance is the business of making tiny loans and providing basic financial products like life insurance and health insurance to the rural poor.
The Sequoia investment could be indication that companies and investors alike are beginning to realize that microfinance isn’t just about improving the lot of the underprivileged, but also about making profits.
Mohit Bhatnagar, operating partner, Sequoia Capital India, says the firm took eight months to finalize its investments in SKS, just “to be confident about the viability of the model of microfinance being offered by SKS.” “We see economic sense in the model. We are confident that microfinance in India is a great tool to offer the whole gamut of financial products to the poor, as everybody has financial needs,” says Bhatnagar.
This makes SKS Microfinance the largest venture- backed microfinance institution (MFI) in the world, in terms of equity capital investment by venture capital funds. SKS Microfinance, founded by Vikram Akula, currently services six lakh women borrowers across 11 states of India and has drawn up plans to reach out to 50 lakh borrowers over the next three years. Armed with additional equity of Rs70-75 crore from the latest round of funding, SKS plans to reach out to more rural and urban poor in Kerala, Punjab and Gujarat. SKS also plans to raise Rs85-90 crore equity through another round of funding over the next six to nine months. It also plans a bond offering of $20 million for the fiscal year beginning 1 April 2007.
“Microfinance is not only about microcredit anymore, although that is the genesis. Microfinance activities include providing emergency loans, life insurance and health insurance to clients. If financial discipline is instilled in the poor, they can provide a great business opportunity,” says Akula, founder and CEO, SKS Microfinance. Other micro finance institutions have found sources of funding beyond bank loans. N.V. Ramana, managing director of Bhartiya Samruddhi Finance Ltd, says the shift from bank-backed financing to equity has started. Today, he says, “half (of the funders) are generally socially motivated and half look at returns.”
In the past, microfinance companies had to look at alternative sources to meet their set-up costs. They depended on grants and donations from high-net-worth individuals. No bank was ready to look at microfinance as a commercially viable model until recently.
With urban markets overbanked, however, banks are now looking at the rural population. With the government mandating that 40% of all loans given by public-sector banks should go to sectors such as agriculture, banks are looking at various partnership models with MFIs.
ICICI Bank, which has identified rural banking as its next growth area after retail banking and its international foray, plans to bankroll the creation of 200 microfinance institutions. These will be funded through the Emerging Microfinance Channel Fund. “Equity investments from large venture capital funds increase the ability of a MFI to borrow loans,” says an ICICI Bank official who did not wish to be named.