Focus on Social Objective, MFIs Told

Tuesday, October 11, 2011

Indian micro lenders, who were gripped by a crisis that began in October last year, are now under pressure from investors not to ramp up growth but to make sure they are sticking to their basic precept of serving the poor.

Microfinance-focused private investors are increasingly making social performance assessment a must for the lenders. Microfinance institutions, or MFIs, provide small loans to poor borrowers. They lend at 24-36% on account of high operational costs, sourcing money from banks to do business.

Investors want to know whether the micro lenders actually benefit the poor, their corporate governance standards, internal audit practices, treatment of employees and transparency of the management in running the firm.

“We are now going into an in-depth operational assessment of these companies. This helps us to see how these firms are actually serving their target customer and not diluting their mission,” said Vishal Mehta, managing director of Lok Capital, which has so far invested around $25 million in nine Indian MFIs. These include Bhartiya Samrudhhi Finance Ltd, Ujjivan Financial Services Pvt. Ltd and Spandana Sphoorty Financial Ltd.

Lok Capital, which typically picks up a stake of up to 35% in MFIs, has $10-12 million lined up to invest in such firms in the next one year, Mehta said. “In the term sheet itself, we have a clause which talks of social performance assessment,” Mehta said. These have to be agreed to before the deal is signed, he said.

Aavishkaar Venture Management Services Pvt. Ltd is also closely monitoring the operations of MFIs to ensure healthy practices.

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