(The author is a Reuters Breakingviews columnist. The opinions
expressed are her own.)
By Una Galani
HONG KONG Aug 23 (Reuters Breakingviews) - Microfinance is
making India's big banks look bad. Small lenders that help the
poor buy everything from bicycles to sewing machines are back
and growing at breakneck speed after the industry nearly
collapsed six years ago.
The last boom ended badly after a number of borrowers
committed suicide. That prompted authorities in Andhra Pradesh
to effectively stop micro lenders collecting debts. The state
once accounted for up to 40 percent of industry loans. The
Reserve Bank of India has since capped usurious lending rates.
India's microfinance firms typically focus on lending to
women in groups where they act as guarantors for one another.
That ensures social pressure to repay. Scale, technology, and
shared credit data has helped the industry to thrive again in a
segment underserved by big banks.
Bharat Financial Inclusion is the ultimate
comeback kid. The group, formerly known as SKS Microfinance,
shrunk after the crisis and is now growing fast. Lending rates
are now below 20 percent - not too far off what big banks offer
well-heeled unsecured borrowers.
Net interest income grew almost 70 percent year on year in
the first quarter, gross non-performing loans are almost
negligible at 0.1 percent, and BFI earns a 29 percent return on
That's much better than India's largest lender, State Bank
of India, where interest income is growing at 4
percent, gross NPLs are 7 percent, and ROE is below 8 percent.
Other state banks are in worse shape.
Banking is a preferred way to bet on rising consumer power.
But the poor health of India's traditional lenders, after years
of crony capitalism, has forced investors to look elsewhere.
That helps explain why BFI shares have risen 50 percent this
year, while shares in smaller rival Ujjivan Financial Services
have risen almost as much since it listed in May. U.S.
private equity group TPG also recently led another fundraising
for Bengaluru-based Janalakshmi Financial Services.
BFI looks fully valued at almost 4 times book value but
other measures suggest room to run. Eikon data shows the lender
trades at just 15 times forward earnings, a measly premium to
SBI on almost 14 times. Super-fast growth is always risky in
finance but microfinance firms are well-placed to meet the huge
demand for credit from India's poor.
On Twitter twitter.com/ugalani
- Shares of Mumbai-listed Bharat Financial Inclusion, an
Indian microfinance company, have risen almost 50 percent this
year. That compares to an almost 9 percent increase for the
benchmark Nifty index over the same period.
- BFI said on Aug. 9 that President S. Dilli Raj was on
leave for two months due to personal reasons. On Aug. 1, BFI
said Raj had been arrested by the country's Enforcement
Directorate relating to a complaint filed against his former
employer First Leasing Company of India.
- The complaint against First Leasing filed by IDBI, a
listed public sector bank, relates to loans agreed in 2012 and
2013, six years after Raj ceased to be an employee of the bank,
BFI added in the Aug. 1 statement, citing his comments from
October. The investigation does not relate to BFI, the company
- Bharat Financial Inclusion was formerly called SKS
- For previous columns by the author, Reuters customers can
(Editing by Quentin Webb and Katrina Hamlin)