110 million good reasons to watch Indian microfinance

> Posted by Anita Gardeva

The number of clients served by the Indian microfinance sector has soared from 20 million to 70 million in just five years. The sector will likely add another 40 million clients in the next four years. That makes 110 million good reasons why all eyes are on Indian microfinance.

Those who are paying the closest attention are investors, who have a lot to gain and lose in this dynamic and rapidly changing sector. On June 23-24th, 2010 equity and debt investors, bankers, venture capitalists, and microfinance leaders gathered in India for Microfinance Cracking the Capital Markets, South Asia. Conference participants offered insights into the realities of the sector. Their opinions and observations included the following:
1. The credit mono-product can be risky: Investors made it clear that the Indian MFIs need to diversify and be innovative with their product range. The current dominant provision of a single product — group lending — creates risks associated with undiversified portfolios, weaker balance sheets, and long-term sustainability. Investors value MFIs that are able to address the needs of clients.  
2. Regulation could hinder future growth: Participants asked what would happen if priority sector lending regulation — which is instrumental in capitalizing Indian MFIs — was removed. This is a possible scenario that could have a heavy impact on the industry. Microfinance practitioners were also concerned about a recent RBI draft regulation on securitization for NBFCs which could hinder the ability of institutions to access more capital and slow the growth of the entire sector.
3. The right MFI valuation is in the eye of the beholder: Investors can’t agree on whether or not Indian MFIs are overvalued.  Some stated that not all risks are properly accounted for in the current valuations (which can be as high as six times book value)while others maintained that Indian MFIs have demonstrated that they are operating with a viable and highly successful model. Most agreed that the important question is not one of overvaluation, but of fair valuations.
Other themes that emerged included the importance of management, attracting private capital, managing growth, and understanding the future demands of the sector.
To learn more about these key themes, download the paper covering the conference highlights.