Andy Mukherjee is a Bloomberg Gadfly columnist covering industrial companies and financial services. He previously was a columnist for Reuters Breakingviews. He has also worked for the Straits Times, ET NOW and Bloomberg News.

It's a pity nobody told Josef Ackermann he should be financing mobile phones; it's a crying shame nobody's persuading Stuart Gulliver to lend money for bicycles, sewing machines and solar lamps.

The former Deutsche Bank CEO spent the pre-crisis years dreaming of a 25 percent return on equity. The current HSBC boss started out with ambitions of 12 to 15 percent but has since tied his reputation to achieving a more modest 10 percent. And while Ackermann failed, and Gulliver is flailing, it turns out ROE of 25 percent is hiding in plain sight in micro-loans.

SKS Microfinance, an Indian lender which on Wednesday announced quarterly profit more than doubled, provides a good example of just how juicy the returns can be. Borrow money at 9.3 percent, lend to millions of small customers at 19.75 percent, and earn a fat profit that will be the envy of any large global bank:

Bicycle Financing, Anyone?
India's SKS Microfinance earns a return on equity far in excess of world's largest banks
Source: Bloomberg
*Index of world's leading 157 bank stocks

Naturally, investors in India are demanding more such money-spinning opportunities. Ujjivan Financial Services' recent initial public offering was more than 40 times oversubscribed. Satin Creditcare Network, which is already listed, wants to raise cheaper money overseas and lower the rate it charges borrowers from 24.99 percent at present, according to The Economic Times.

This growing enthusiasm for micro-lending is understandable. Corporate credit demand is weak, and India's banking system is creaking under the weight of bad loans to billionaires. Some of the micro-financiers -- like Ujjivan and Equitas Holdings -- will soon become banks, which will give a further boost to profitability by lowering their cost of capital.

Still, the outsize returns should be a source of unease. In fact, investors would feel a lot safer if returns from micro-lending were lower. After all, it does stretch credibility to believe that credit growth of 50-plus percent year after year won't lead to accidents. And since there's no collateral, defaults, when they come, will mean losses of 100 percent, according to brokerage Religare. Setting aside more money now to deal with those eventual losses would be prudent.

SKS, with an ROE last year of almost 25 percent, said in an investor presentation that it can target a ``steady-state" return on assets of 4 percent. That's unrealistic, given increasing competition and rapidly growing loan books. HDFC Bank, India's biggest by market value, hasn't even earned half as much in any year in the past decade. And SKS, whose business was almost crippled five years ago after a spate of suicides by borrowers led to a clampdown on micro-finance in one Indian state, should know better than to underestimate the political and regulatory risk that comes with the terrain.

Small Can't Be That Beautiful
Indian micro lenders have a higher price-to-book ratio than the country's biggest bank by market value
Source: Bloomberg

Loans for starting tiny businesses or for buying sewing machines and mobile phones will always be in demand. They will also, by and large, be socially useful. But if the profitability of micro-finance looks too good to be true, then it probably is.

For one, the industry is ripe for an assault by fintech, which will probably lead to investors backing micro-finance businesses that earn smaller, but less risky, profits by securitizing loans made entirely from equity capital. Leverage will go out the window, and so will lavish returns. HSBC's Gulliver can keep working on that 10 percent ROE target. He isn't missing much.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

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Andy Mukherjee in Singapore at

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Matthew Brooker at