India’s latest microfinancing boom is leaving the country’s big banks in the dust

Microfinance is making India’s big banks look bad. Small lenders that help the poor buy everything from bicycles to sewing machines are back and growing at breakneck speed after the industry nearly collapsed six years ago.

The last microfinance boom ended badly after a number of borrowers committed suicide. That prompted authorities in Andhra Pradesh to effectively stop microlenders from collecting debts. The state once accounted for up to 40 percent of industry loans. The Reserve Bank of India has since capped usurious lending rates.

India’s microfinance firms typically focus on lending to women in groups where they act as guarantors for one another. That ensures social pressure to repay. Scale, technology and shared credit data has helped the industry to thrive again in a segment underserved by big banks.

Bharat Financial Inclusion ( BFI) is the ultimate comeback kid. The group, formerly known as SKS Microfinance, shrunk after the crisis and is now growing fast. Lending rates are now below 20 percent – not too far off what big banks offer wellheeled unsecured borrowers.

The company’s net interest income grew almost 70 percent year- on- year in the first quarter, gross nonperforming loans ( NPLs) are almost negligible at 0.1 percent, and BFI earns a 29 percent return on equity.

That’s much better than India’s largest lender, the State Bank of India ( SBI), where interest income is growing at 4 percent, gross NPLs are 7 percent, and equity return is below 8 percent. Other state banks are in worse shape.

Banking is a preferred way to bet on rising consumer power. But the poor health of India’s traditional lenders, after years of crony capitalism, has forced investors to look elsewhere. That explains why BFI shares have risen 50 percent this year, while shares in rival Ujjivan Financial Services have risen almost as much since it was listed in May. US private equity group TPG recently led fundraising for Bengaluru- based Janalakshmi Financial Services.

BFI looks fully valued at almost 4 times book value but other measures suggest room to run. Eikon data shows the lender trades at just 15 times forward earnings, a measly premium to SBI on almost 14 times. Super- fast growth is always risky in finance but microfinance firms are well- placed to meet the huge demand for credit from India’s poor.