Microfinance Industry in India

Evaluating progress of the Indian microfinance sector from an investor’s perspective
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This paper reviews the growth of the microfinance sector in India.

The microfinance sector in India has developed a sustainable business model that has overcome challenges traditionally faced by the financial services sector in servicing the low-income population. The paper states that the Indian microfinance sector:

  • Generates a Return on Equity of 20-30%, driven by commercial bank financing, strong operating efficiency and high portfolio quality;
  • Is increasingly becoming a viable investment sector for commercial and social investors given its growth and maturity;
  • Has equity valuations that are higher than the financial sector due to high growth expectations and substantial availability of debt;
  • Can expect growth in availability of debt to support expansion as more domestic banks and alternative debt providers enter the market;
  • Can, over the short and medium term, see MFI shares trade at significant premia to book value and cool down over the longer term as the industry matures.

Finally, the Indian microfinance sector presents several exit opportunities including secondary and trade sales as well as mergers and acquisitions. Larger MFIs may also consider going public.