Finance companies that provide loans to small businesses are grabbing the attention of risk capital investors.
Finance companies that provide loans to small businesses are grabbing the attention of risk capital investors. Private equity fund WestBridge Capital, which primarily buys stake in listed companies, said it will acquire a minority stake in the Bangalore based non-banking finance company Vistaar Finance for Rs 100 crore.
In backing small business lenders, risk capital firms are hoping to recreate the success they have seen by investing in gold loan financing companies. "It's a large untapped market which is getting organised. Just as it happened in gold financing, it will happen in SMEs," said Rishi Navani, Managing Director, Matrix Partners.
The Chennai-based lender provides secured loans to over 5,000 businesses and is present across 30 branches in Tamil Nadu. Matrix Partners has also invested in gold loan provider Muthoot Finance.
Most risk capital firms are buying stakes in a new set of finance companies that lend to small enterprises in sectors ranging from power looms to groceries. This includes finance companies like NeoGrowth Credit, Vistaar Finance, Kinara Capital as well as slightly more mature companies like Five Star Business Credits and Intec Capital. These companies are expected to gain from demand for debt amongst small business across India.
According to a November 2012 report by the International Finance Corporation overall finance demand of medium, small and micro enterprises totals Rs 32.5 trillion. Just about a fourth of this demand is met by formal banking sector with loan sizes mostly ranging from Rs 5 crore to Rs 20 crore.
However, small businesses are hungry for bite-sized funding in the range of Rs 1 lakh to Rs 20 lakh. It is this category that finance companies are targeting by offering loans at interest rates of about 20 per cent.
"It is critical to understand the MSME businesses, which will be a value driver for these NBFCs," said Niren Shah, Managing Director, Norwest Venture.