Microfinance institutions in India: perspectives and strategic choices

Abstract

Microfinance has been one of the newer and more innovative ways of providing financial services to the unbanked and under banked sections of India. While the variety of microfinance institutions (mFIs), the range of products they offer, their financing and other operational idiosyncrasies are unmatched compared to anywhere else in the world, there are also a number of unique challenges being faced by this class of financial institutions. The common challenges being faced by them relate to their access to assured and cheap capital, availability of skilled talent and the absence of an enabling regulatory environment conducive to growth. Indian mFIs are taking to untested waters in their quest for sustainable growth. In accessing capital, for instance, one observes strategic partnerships between commercial banks and mFIs, securitisation of mFIs loan books, investments by venture capitalists and even an IPO. However, they also need to ramp up their business strategies and adopt a set of coherent policies to attain size and scale in the medium run. These include deepening of the market, while widening it at the same time, targeting clients based on non-traditional approaches, treading a fine balance between competing and co-opting the commercial banks in business growth, etc. There is also a need to look into marketing-related aspects in all strategic initiatives of this sector, something most mFIs have neglected for long. A market orientation in business operations, it is argued, would tend naturally to translate into scale and sustainability of these enterprises. A third issue for attaining scale and cost reduction is that of adoption of technology and IT systems, which has been demonstrably proven to work for many mFIs across the world. A fourth set of issues, which lie in the policy domain, relate to creating an enabling environment for the growth of the microfinance sector. These primarily include, though are not restricted to, amendments to various statutes which inhibit the sector from taking full advantage of the opportunities available to the mainstream financial sector. While analysing the challenges and prospects of Indian mFIs, it is also important to have are-look at the parameters under which these unique institutions should be understood and judged. A modification of the usual CAMEL system of analysing financial institution is deemed necessary. Organizations like CRISIL and CGAP have suggested a slew of ratios (e.g. the MICROS system by CRISIL), which are more suitable to rate mFIs on various parameters unique to these institutions. The new-age microfinance institutions hold great promise for achieving total financial inclusion of all sections of the Indian society. It is, therefore, necessary to understand their unique position in moving towards this objective and create the right ecosystem for this to happen.