Private equity in Indian microfinance

Abstract

Microfinance in India has been a rapidly growing industry and has witnessed the mushrooming of several new players. Some of the leading players have recorded 75-100% growth rates in portfolio sizes with an equally high growth rates in the number of borrowers. While the Self help group model of microfinance delivery still dominates, the Microfinance Institution (NBFC) model is quickly gaining in popularity due to its greater promise of sustainability. The presence of economies of scale in this business makes further consolidation imminent. Equity capital is crucial for the MFIs if they intend to scale up their operations because their leverage levels are constrained by RBI’s capital adequacy norms for NBFCs. The industry has thus attracted private equity capital from local and foreign players. While this provides the MFIs with much needed capital there is a concern that participation by PE firms, which are solely profit-driven, might cause a mission drift. We intend to study the rationale behind private equity investments in microfinance and its potential impact on the industry.