Olympus Capital Asia is to invest US$30 million in microfinance operator CreditAccess Asia, as regulators across the region look to channel funds to small businesses and tighten the screws on loan sharks, the private equity firm said on Tuesday.
Founded in 2006, CreditAccess Asia wants to expand its retail lending operations and aims to double its client base to over three million customers over the next two years.
Paolo Brichetti, chief executive officer of CreditAccess Asia, told FinanceAsia that the firm is profitable and eyeing new markets. “We are reinvesting our profits to grow our businesses in the current markets -- India, Philippines and Indonesia -- and in new markets like Vietnam,” he said.
Olympus Capital’s investment follows a decision by India’s central bank in September to license ten financial institutions to set up small banks to provide microfinance to its citizens.
The new licence holders in India are expanding and competing for capital, which has depressed valuations for investment in microfinance.
“There is a fair number of microfinance companies in India that have recently been granted new licenses to convert to small finance banks; they will require additional domestic capital to meet regulatory requirements and that is likely to moderate valuations to a certain degree,” Daniel Mintz, managing director of Olympus Capital Asia, told FinanceAsia in a phone call from New York.
Across the region valuations for startups by non-traditional lenders using new technologies, dubbed fintech, are cooling off as investors become increasingly concerned about slowing growth.
However, fundamentally technology remains key to microfinance.
“Technology is incredibly important in microfinance because you are dealing with so many small transactions," Mintz said. "Great systems really help with functions such as credit scoring, record keeping and helping your collection people efficiently reach clients.”
For Olympus Capital, investing in CreditAccess means it is backing a regulated player with fewer political risks, given the clamp downs seen across the region in recent years, from Japan to India.
“As an organized and regulated player you are replacing curb-side lending … you’re marching very much in step with government policy and extending credit to sectors that are under banked,” Mintz said.
Over half of the world’s unbanked population resides in Asia, according to the World Bank. India and Southeast Asia, where CreditAccess Asia operates, have a combined population of about two billion people and more than 200 million households.
CreditAccess Asia raised 40 million euros in 2014 and has said it plans to IPO in 2017, according to its website.
Small is beautiful
Microfinance is a highly underpenetrated and potentially profitable business with high barriers to entry. Loan spreads are high and delinquencies are usually low.
The collection efficiency for most microfinance institutions in India is greater than 99%. That makes a high return on equity possible. 20% is achievable, said Morgan Stanley analysts in a research note.
The industry generally deals in small-ticket loans of between $35 and $250 to low-income segments such as farmers and corner shops. The financiers need extensive networks to go into villages and ensure repayment.
It is a manpower-intensive business, involving doorstep delivery, cash disbursements, and cash collections. Loans are typically low-ticket and short-tenor, so the loan book-to-employee ratio is low compared with most other lending businesses.
CreditAccess Asia employs some 5,400 people across more than 450 branches.
Scale and solid auditing systems are therefore imperative to keeping a lid on operating costs. Loans are generally unsecured and hence write-offs can be almost 100% in the event of poor underwriting.
“This is not a sexy, big-ticket business. You have to grind it out and have really good systems and a lot of employees,” Mintz said.
Big commercial banks have generally eschewed microfinance given the cumbersome and costly nature of dealing with small-ticket loans. However, Mintz noted that if a company can identify profitable patterns of repayment in certain segments of society then the yield can be much higher than with big loans to big corporations.
“Groups of women that co-sign with each other and use the money for small craft enterprises have incredibly low default rates,” he said, by way of example.
Amsterdam-headquartered CreditAccess Asia is already profitable with more than 1.3 million clients and a loans portfolio that more than doubled last year to €240 million ($258.9 million) and is expected to grow by another 50%-plus in the current fiscal year to March 31, CreditAccess Asia’s Brichetti told FinanceAsia.
Olympus Capital Asia will have a seat on the company’s board.