Column : Small is beautiful and efficient

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: legal costs because of being in the informal sector and you get very high margins for micro-enterprises. The result is that, despite the collapse of the mainstream financial world, microfinance continues to thrive.

At SKS, for example, in the month of October, we disbursed Rs 512 crore in loans to our existing 30 lakh clients and added 4 lakh new clients—that’s close to 10 clients a minute! And we continue to see huge demand across the country. Meanwhile, our repayment rates remain 99%. We see this vibrancy in microfinance not only in India today, but also saw this during the recession of the late 1990s that hit Southeast Asia and Latin America. Despite the turmoil, MFIs held a steady loan portfolio and some even increased their profits.

Finally, microfinance companies are typically privately-held companies that usually have long-term owners that are less driven by market forces. Also, priority sector policies ensure that, despite credit tightening, the government has a strategic interest in ensuring that the rural poor get funding. In addition, average debt-to-equity ratios in microfinance are in the 3-6 range as opposed to much higher leverage ratios in commercial banks. This makes the microfinance sector much stronger than the mainstream commercial financial services world.

What is most significant is that investors are starting to realise that even in these tough times, microfinance is a quality investment. Consider the statement of the chief investment officer of TIAA-CREF, one of the largest pension funds in the world. In making a $43 million investment in the MFI, ProCredit in 2006, he said, “this investment in ProCredit, gives us an opportunity to seek competitive returns through socially responsible investments that we believe have a low correlation to traditional equity and fixed income markets.”

The idea that microfinance is negatively correlated or decoupled from the financial world is also taking hold in India. This month, SKS received $75 million of private equity, the largest equity investment in microfinance in the world. And this closed just a few weeks after Lehman Brothers collapsed. Even Bill Clinton commented on the phenomenon, saying investors should “consider the poor of developing nations as viable investment alternatives to today’s turbulent markets.” If investors heed these words, the flow of capital to microfinance and the poor that benefit from it would truly be the silver lining of the economic crisis.