Microfinance now seeks to tap the loaded gentry

After luring private equity players, insurance and mutual funds into investing money, the India microfinance sector, which lends to the un-banked poor, is vying for the wealth of the super rich Indians.

For starters, investment bankers helping microfinance institutions raise money are talking to wealth managers to invest in a  sector that lends at 22-26% rates.

“So far, all the money raised through private equity has been foreign. What we need is domestic capital. We are approaching various wealth management funds,” said Royston Braganza, CEO of Grameen Capital India, which is an investment bank catering exclusively to the microfinance sector.

To boot, growth is white-hot. Microfinance institutions have been clocking loan growths of between 75% and 150% in the past.
The sector as a whole is poised to double lending this financial year, experts said.

Wealth managers usually have a client base of people with a net worth of over Rs 25 lakh and an investible surplus to stomach the long-term investment needs of microfinance sector.

Traditionally, the sector has been thriving on bank
funds, after which the larger players got private equity funding.
Various options on the debt and equity front such as securitisation and non-convertible debentures, which were unheard of in the industry, have been used in recent months by some microfinance institutions.   

Bajaj Allianz Life Insurance, ICICI Prudential Asset Management, Canara Robeco Mutual Fund and Religare Asset Management have participated in these options thus bringing domestic funds for the microfinance sector.

Some of the bank-affiliated wealth managers are also getting requests for diverting investment in the sector through equity or debt from the microfinance institutions that have a tie-up with the bank.

“We have been tracking the sector closely for a few months now. One person from a merchant banking firm approached us. Microfinance institutions, too, have been directly approaching us offering their debt. There are other structures and participation models emerging,” said the head of a foreign wealth management services company.

Clients may invest part of their money through social causes, which may also give them the return and an opportunity to serve the poor,” he said.

Vishal Kapoor, general manager - wealth management at Standard Chartered Bank, says, it is a different opportunity and an interesting idea.

“We would want to look at that closely, but whatever we have looked at impresses us. Rich clients have social causes and are always looking at some ways of investing for a social cause. These clients might look at microfinance as a social-cum-financial opportunity,” Kapoor said.
The sector stands a chance of being a worthy investment destination as the bad loans as a part of the total loan book stand at a minuscule 0.4-0.5%.

This is because microfinance institutions lend only to women and that, too, in a group format.

So, a group of women taking the loan ensure each of the group members pays back the loan. Peer pressure is often used as a tool. The loan sizes are also small.

Satya Narayan Bansal, CEO, India, at Barclays Wealth, said high-networth individuals are always looking at different avenues to invest.

“A lot of them are discussing about the sector. They are interested in the growth of the sector,” Bansal said.

“It is being discussed whether the sector is fit for investments and the ways of investing - whether directly or through a private equity fund,” he said.

But discussions are in the early stages, he said.

K Ramachandran, chief investment officer at Karvy Private Wealth, said it could be an emerging area of interest because of the social aspect of investment.

“The rich are looking at options of social investing which helps them discharge what they feel are social obligations,” Ramachandran said.

The sector needs $500 million in the next financial year, considering a moderate growth rate of 75% on its existing base of Rs 22,000 crore worth of loans outstanding, says Vijay Mahajan, chairman of a microfinance entity Basix.

“This need can only be fulfilled through equity,” Mahajan said.