LM : Small Industries Development Bank of India (Sidbi) to Invest in Microfinance Firms: Apr 2, 2007

Small Industries Development Bank of India (Sidbi) plans to create a corpus
of Rs50 crore exclusively for investment in micro finance institutions as it
believes the business holds the potential for high returns.

Sidbi’s board has already discussed plans and while formal approvals are
still pending, the bank is working out the gameplan, said a person familiar
with the plan.

Sidbi, where the government controls about 81% of the equity through
state-owned banks and insurance companies, currently lends money to
microfinance institutions. These institutions later lend the money to the
actual customer.

Now, SIDBI feels the returns to shareholders of these institutions are large
enough to view them as promising long-term investments.

Micro finance institutions are a mixed bag. Some of the larger ones such as
SKS Microfinance and Spandana Sphoorty Innovative Financial Services are
organized as joint stock companies. Others exist in the form of trusts and
societies.

SKS Microfinance, which secured $11.5 million in funding from private-equity
investors last week with Sequoia Capital as the lead investor, said it
earned shareholders a return of equity of 24% in 2005-06.

SKS aims to generate a return on equity of 20-24% in the near future, said
its founder and CEO Vikram Akula. Returns in that range would be above what
most banks earn. For instance, the highest return on equity recorded by
India’s largest bank, State Bank of India, in the 11 years up to 31 March
2006 was 19.4%.

Akula said the business potential of microfinance institutions would
eventually attract an increasing number of investors with a commercial
focus.

“My sense is we will find it (investments from commercial investors)
overtaking social funds,” said Akula.
It is unlikely that all micro finance institutions can generate the profit
that SKS says it obtained last year. Akula said globally not more than 1% of
micro finance institutions have a model which allows the institution to grow
fast and benefit from economies of scale in sourcing funds and running
operations.

SKS is among the largest microfinance institutions in India. It has lent
money to about six lakh women spread across 11 states, with a total
disbursement of nearly Rs700 crore. Most microfinance institutions in India
are a fraction of SKS’ size.

The government tabled The Micro Financial Sector (Development and
Regulation) Bill, 2007, in the first half of Parliament’s Budget session, to
provide a framework for the sector’s orderly growth.

The Bill aims to regulate numerous small micro finance institutions that
exist in the form of trusts and mutual benefit societies.

SIDBI is looking at ways through which it can acquire a stake in micro
finance institutions that do not have a joint stock structure at present.
The assumption being made by SIDBI is that as these institutions grow, they
would consider moving to a joint stock organizational structure to raise
capital needed to finance growth.

Once some of the micro finance institutions grow to meet the business
potential provided by the government’s sectoral credit estimate of
Rs75,000-Rs100,000 crore, Sidbi could get its exit opportunities.
Not everyone, however, is convinced that micro finance provides rich
long-term opportunities for investors.

K.N. Bhanumurthy, associate professor at Institute of Economic Growth, felt
the sector was in a fluid state, which may account for high returns for some
players. “A lot of churning is going on; a lot of asymmetric information
still exists,” he added.

Once all the stakeholders get a better grip on the situation, returns will
begin to taper, said Bhanumurthy.