Small deal, big deal

Small deal, big deal

The $11.5 million investment by Sequoia Capital in SKS Microfinance may seem like small change in this era of billion-dollar deals. But it is an indication that the Indian microfinance business has come of age.

One problem has been the lack of scale. Most microfinance lenders are NGOs, which restricts their ability to raise capital and grow. A few microfinanciers have converted into finance companies. SKS is one of them. The capital infusion from one of the world’s bulge-bracket venture capital firms shows the advantages of corporatization. More such deals are very likely.

Microfinance can be very profitable after some time. SKS’s own return on equity has shot up from a negative 59.44% in 1999 to around 23% today. That is better than most banks.

But there is a fear. Will pressure from profit-seeking investors and risk-wary regulators force a company like SKS to abandon the very poor—which is the whole point of microfinance?