India’s Microfinance Institutions Seem to Have Stood the Test of Time Small’s Big Now India’s Microfinance Institutions Seem to have stood the test of time. But they need to hit the Country road and reduce cost of time. But they need to hit the country road and reduce cost of funds for any meaningful attempt at tackling poverty. Garibi Hatao. Different versions of this slogan have been heard by generations of Indians since Independence. Sixty years later, such slogans are being replaced with the more sophisticated and less dramatic ‘financial inclusion’. In the interim, several measures have come and gone. There have been subsidies, doles, one time grants, food-for-work programmes and employment guarantee schemes to mention a few. But the problem of poverty remained. One such intervention that has gained currency is microfinance. Started around two decades ago as a programme linking banks to women’s self-help groups (SHGs), the microfinance sector in the country has, over the years, proved two simple facts. One, that it is sustainable, having passed the test of time by being around for twenty-odd years with significant impact on the lives of the poor, and two, that the poor are bankable. Though these were crucial in laying the foundation for the booming microfinance sector, a lot more is needed to define the way forward. The limited reach of the poor to funds remains a point of worry as does the high transaction cost. As Ms RV Bhavani, director, BV Rao Centre for Sustainable Food Security at the MS Swaminathan Research Foundation in Chennai puts it: “Cost of funds, spread of network and maintaining viability of operations This apart, the uneven geographical spread also needs to be dealt with. Around 75% of all micro credit activity in the country is concentrated in the four southern states of Andhra Pradesh, Karnataka, Kerala and Tamil Nadu. In the coming days, micro finance must grow out of being just micro credit – delivering small loans to economically active poor – to Single product portfolios will have to make way for multi-product offerings, including insurance. That would also call for new systems and processes. That is not all. With the private sector having become equally active in this market, the days ahead will also probably redefine the relationship between the banks, the traditional funders and microfinance institutions (MFIs). Most bankers, of course, believe that bank lending will continue to remain the predominant source of funding except that the rules of the game may change. From a love-hate relationship between the formal banking sector Some MFI players believe that a consolidation in the market is in the offing. According to Mr Vikram Akula, founder of Andhra-based SKS: “Most of the MFIs will become front-ends for banks. The former will originate and service the loans, like DSAs, and the latter will keep them on their balance sheets, much like ICICI Bank’s existing partnership model.” SKS was recently in the news for raising the first mainstream venture capital funding from Acknowledging that “MFIs are addressing a lacuna in the formal system,” Mr Akula, on the other hand believes that “a few MF players will become Typically, these would be the MFIs backed by private equity and venture According to Mr Sandeep Farias of Unitus, a global microfnance accelerator, “consolidation is also another way some institutions will build scale and given the dynamic nature of the industry, it is possible that we will see the first attempts at consolidation in the next 12 months. However, this consolidation is not likely to see a significant change in the number of institutions that are involved in microfinance.” Unitus works with a The flow of private equity, including VC funding, which is expected to increase in the coming days, will have an impact in the way the bank-MFI relationship is defined. Already private capital is flowing into the large MFIs which work on a for-profit model and have strong fundamentals. In the recent past private equity has come in from individuals like Mr Vinod Khosla, founder of Sun Microsystems, Unitus, the Michael and Susan Dell From the simple bank-SHG linkage programme, essentailly patronised by Mr Mark Straub of Lok Capital feels that the sector is not yet ready for The sector is serviced by two parallel systems. The bank-SHG linkage The second system is that of private MFIs supported by new generation While most MFIs in the country are either NGOs or trusts or Combinedly, the two systems are estimated to cover roughly 10% of the It is amply clear that the huge uncovered capital requirement cannot be “The problem with the formal banking system has been its inability to reach out Some argue that funds are not in short supply. In fact, with venture Says Samit Ghosh, CEO of Ujjivan Financial Services, an NBFC-MFI for the The general belief, however, is that most MFIs do not have the Scale is, of course, going to be very critical for reducing the cost of Speaking for all NBFC-MFIs, Mr Ghosh of Ujjivan says, “The only way we The issue that remains central to all this is, how do existing micro “Poverty alleviation is not a short term process. The life of the poor Rs 2,00,000 cr The combined demand for credit from rural and urban poor Rs 10,000 cr Total advances flowing through the system as recorded in banks’ books Rs Advances to self-help groups from public sector banks and Nabard Saswati |