Equity Investment in Indian Microfinance: A Guide for Practitioners

This guide discusses the recent rise in equity investment in Indian microfinance. It describes the process of obtaining equity financing and working with investors.

Private equity has entered microfinance in India, with microfinance-focused funds and mainstream private equity players investing in the sector. The large growth in equity investment and high valuations of Indian MFIs is due to:

• Strong fundamentals of the Indian microfinance sector;
• Decreasing costs;
• Rapid expansion;
• Low correlation between the performance of microfinance assets and the overall economy.

MFIs must transform into nonbanking finance companies and develop a strong board in order to be seen as viable, attractive investment opportunities. They should also demonstrate strong growth potential and efficient operations, have a high quality management information system, and a clear mission. MFIs seeking to raise equity must:

• Develop a business plan;
• Gather historic financial and operational data;
• Estimate future growth;
• Compile non-financial information;
• Estimate value of the MFI;
• Reach out to potential investors;
• Negotiate with interested investors.