The Next Debt Bubble? PE Fuels Subprime Microfinance in India
Microfinance, small business loans to the urban and rural poor, was originally conceived as a tool for poverty alleviation. It has become big business - and private equity has rushed in. The Wall Street Journal of August 13 reports that in India, private equity funds among other investors have "poured billions of dollars over the past few years into microfinance world-wide", using methods reminiscent of the aggressive, predatory lending which spawned the subprime debt bubble in the US. In India today, the article reports, "Some poor neighborhoods are being 'carpet-bombed' with loans" bearing interest of 24% to 39%.
India's urban and rural masses now find themselves caught in a pincer movement of indebtedness. While tens of thousands of Indian farmers now annually commit suicide because they are unable to pay off debts, the urban poor have become victims of loansharking on an expanded scale - and private equity is playing its part.
According to the WSJ, "Nationwide, average Indian household debt from microfinance lenders almost quintupled between 2004 and 2009, to about $135 from $27." The individual sums pale besides the trillions spent in the rich world's buyout spree, but the recipients of these loans frequently subsist on a dollar a day or less.
Access to greater funding for microloans has expanded exponentially as the big lenders of small loans have turned their backs on non-profit activity and registered as for profit financial service firms. Enter private equity: "Of the 54 private-equity deals (totaling $1.19 billion) in India's banking and finance sector in the past 18 months, microfinance accounted for 16 deals worth at least $245 million, according to Venture Intelligence, a Chennai-based private-equity research service.
"International private-equity funds started taking notice of Indian microfinance in March 2007. That's when Sequoia Capital, a venture-capital firm in Silicon Valley, participated in a $11.5 million share offering by SKS Microfinance Ltd. of Hyderabad, India, one of the world's largest microlenders.
"SKS showed the industry how to tap private equity to scale up," said Arun Natarajan of Venture Intelligence.
"Numerous deals followed with investors including Boston-based Sandstone Capital, San Francisco-based Valiant Capital, and SVB India Capital Partners, an affiliate of Silicon Valley Bank."
The World Bank-associated Consultative Group to Assist the Poor estimates global microfinance funds under management at over USD 6.5 billion - an estimate of how far it has travelled.
And as loan officers on commission rack up new loans, indebtedness has skyrocketed - from a few hundred million dollars in outstanding loans in 2004 to nearly USD 2.5 billion today, with the number of lenders increasing from 53 to 233.