A trend in initial public offerings (IPOs) by microfinance institutions in India could potentially increase the risk of defaults by microborrowers. SKS Microfinance, an Indian microfinance institution, has recently filed to raise up to USD 250 million in an initial public offering (IPO), as initially reported by MicroCapital on March 9, 2010. This pending IPO is causing concern that an IPO trend in India could trigger a trend in microfinance institutions’ (MFIs’) funding sources, as reported by MicroCapital on June 16, 2010, which could raise the risk of loan defaults by pressuring MFIs to disburse riskier microloans.
Traditionally, MFIs in India are funded by loans and grants from other financial institutions and foundations. However, if an IPO trend occurs, a greater number of MFIs could receive funding from public investors. As such, MFIs may face increased pressures to provide asset and revenue growth, thus increasing the risk that loans will be granted to borrowers who might otherwise not have been eligible for a microloan, thus increasing default risk. Additionally, investor interest in MFIs which are granting high risk loans due to their potentially high yield could cause valuation issues, considering this is a business environment in which due diligence on loan recipients is often not performed, as India does not have a national system for tracking borrowers’ credit histories.
Some worry that this environment is similar to the one which preceded the recent economic crisis in the United States. “Globally, microfinance is showing characteristics of the Western financial markets before the collapse,” says Sanjay Sinha, managing director at Micro-Credit Ratings International (M-CRIL) in Gurgaon. “In the U.S., homeowners were given loans at 120 percent of the value of their properties. In rural India, people are being lent to at 150 percent of the value of their enterprises.” [1]
India is a large microfinance market and is expected to grow significantly over the next few years. According to MIX Market, as of 2008 its total microfinance institutions’ combined gross loan portfolio was USD 2.1 billion and total assets were 3.0 billion.
By Jennifer Shevock, Research Associate
About SKS Microfinance:
SKS Microfinance is a microfinance institution, launched in 1998, that caters to women clients in India. In 2005, it transformed into a for-profit non-banking financial company. As of September 2009, SKS had 1,676 branches. According to the MIX Market, the microfinance information clearinghouse, its total assets as of March 31, 2009, were USD 596 million with 3.5 million active borrowers, and it reported return on assets of 3.68 percent and return on equity of 18.72 percent. SKS Microfinance products include: income generating loans, mid-term loans, individual loans, loan cover insurance and health insurance. Equity investors include Sequoia Capital, Vinod Khosla, Small Industries Development Bank of India, Bajaj Allianz, Yatish Trading, Kismet Capital, Sandstone Capital, Silicon Valley Bank and Unitus.
Sources and Additional Resources:
[1] “Worrying Signs in India’s Microfinance Boom” June 17, 2010. http://www.businessweek.com/magazine/content/10_26/b4184050319788.htm
MICROCAPITAL BRIEF: “India’s SKS Microfinance IPO Could Trigger Trend in Microlending” June 16, 2010. https://www.microcapital.org/microcapital-brief-indias-sks-microfinance-ipo-could-trigger-trend-in-microlending/#more-5208
MICROCAPITAL BRIEF: “Initial Public Offering (IPO) of India-based Microfinance Institution (MFI) SKS Microfinance Raises Questions about Ethics within the Industry” April 13, 2010. https://www.microcapital.org/microcapital-brief-initial-public-offering-ipo-of-india-based-microfinance-institution-mfi-sks-microfinance-raises-questions-about-ethics-within-the-industry/
MICROCAPITAL BRIEF: “MICROCAPITAL BRIEF: SKS Microfinance, a Microfinance Institution (MFI) Based in India, Expected to File for Initial Public Offering (IPO) in Next Four Weeks”
March 9, 2010. https://www.microcapital.org/microcapital-brief-sks-microfinance-a-microfinance-institution-mfi-based-in-india-expected-to-file-for-initial-public-offering-ipo-in-next-four-weeks/#more-4531
MICROCAPITAL STORY: “SKS Microfinance Plans for India’s First Microfinance Institution’s (MFI) Initial Public Offering (IPO), Managed by Citigroup, Credit Suisse and Kotak Mahindra Capital”
October 12, 2009. https://www.microcapital.org/microcapitalorg-story-sks-microfinance-plans-for-india%E2%80%99s-first-microfinance-institution%E2%80%99s-mfi-initial-public-offering-ipo-managed-by-citigroup-credit-suisse-and-kotak-mahindra/#more-3815
MICROCAPITAL STORY: https://www.microcapital.org/microcapital-story-sks-microfinance-raises-754m-in-equity-capital-in-transaction-led-by-sandstone-capital/
MICROCAPITAL PAPER WRAP-UP: “MICROCAPITAL PAPER WRAP-UP: Microcredit as a Variant Form of Sub-Prime Lending by John D. Conroy for the Foundation for Development Cooperation (FDC)” June 16, 2010. https://www.microcapital.org/microcapital-paper-wrap-up-microcredit-as-a-variant-form-of-sub-prime-lending-by-john-d-conroy-for-the-foundation-for-development-cooperation-fdc/
MICROCAPITAL UNIVERSE: https://www.microcapital.org/microfinanceuniverse/tiki-index.php?page=SKS+Microfinance
MIX Market: http://www.mixmarket.org/mfi/country/India
Browse the MicroCapital Universe and add your entry to the wiki at: https://www.microcapital.org/microfinanceuniverse/
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