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December - 2010 - issue > Editor's Desk
Is-India-on-the-Perils-of-Microfinance?
Christo Jacob
Monday, December 13, 2010
Mahathma Gandhi once said "India's soul lies in the villages of India." It seems that the new generation entrepreneurs have realized it for they are looking at rural India as a big opportunity to flourish the country as well as their business through microfinance. Unlike the initial years of Microfinance industry (MFI), this space has undergone a transformation from charity to profit-based in the past few years as the players are facing increased competition in the rat race to reap profits. But does this transformation help rural India to achieve the goodwill?

Indian microfinance institutions have grown at a spectacular rate between 2004 and 2009, with an average size portfolio increasing 107 percent on a year on year basis, while number of clients increasing 91 percent. As per the statistics, the Indian MFI would cross 11 crore borrowers and $30 billion in loan portfolio by 2014 and will require a huge capital inflow both in debt and equity. The growth is expected to come from underserved states that are witnessing a flurry of activity, and also from a range of new financial and non-financial products that are being introduced in the sector. The full potential of microfinance has not been fully explored in geographies such as Uttar Pradesh, Bihar and north-eastern states of India. The microfinance penetration in India is merely 3.6 percent, and 60 percent of the portfolio is concentrated in the southern states of Andhra Pradesh, Tamil Nadu and Karnataka.

While the reason holds good for flourishing rural India, the leading players at the forefront, can learn from mistakes. Replicating the current model will not work, as Crisil (a credit ratings organization) estimated that collections in Andhra have plummeted below 20 percent from nearly 99 percent to the ordinance, with MFIs finding it difficult to make contact with borrower groups. Money is lure and it is easy to pool more customers at the bottom of the pyramid, since access to money is very difficult there. So effectively managing and utilizing will be a cumbersome job. For microfinance players, they would have to really work on a model that is transparent for the players so that it can be successful in repayment process, which will adversely help in their growth. Moreover putting an effective council for these players to control on the interest rates will help to monitor on worsening the economic conditions.

Lets not repeat another subprime mortgage in India!
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