The Future and Direction of Microfinance in India

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Reaching the Unreached Microfinance industry is set to reach new heights. With superlative growth numbers in a period of economic downturn, the sector has come to attention of a wider range of investors. Despite the widespread liquidity crunch, the SHG-bank linkage and the group lending microfinance institution (MFI) models recorded impressive increase both in terms of number of households reached and volume of loans. During the year 2008-09 6.9 million new members were added under SHG model taking the total membership tally to 54 million. Meanwhile, in the same period, MFIs added 8.5 million new members, taking the total client base to 22.6 million. The total outstanding microfinance loans including credit to SHGs by banks amounted to Rs.359.39 billion as on March 2009: a growth of 30% over last year. By the end of March 2009, these numbers in combination constituted 1.29% of gross bank credit of scheduled commercial banks1. However the regional bias still exists: the north and eastern India are still largely underserved, and many areas in the north and north-east regions remain entirely untouched. The deeper penetration in new and existing areas has opened many organisations to new and diverse risks. These risks come in the form of multiple lending, large loan size disbursement in poorer markets, migration of borrowers and so on. These risks are further exacerbated by the fact that, with the focus on achieving numbers, poaching of groups and multiple lending has become common within Indian microfinance. Sporadic warning signs have been seen in south where concerted resistance from clients to making repayments in the face of multiple loans is growing. The standardised lending systems, loan amounts, and weekly meetings/repayments ... ... middle of paper ... ...phisticated deals including a variety of forms of securitisation, non convertible debentures (NCD), commercial paper, purchase of loan books and subordinated debt-based lending have already been completed, and IPOs are anticipated from SKS and at least 3-4 other of the larger NBFCs. Clearly IPOs are the preferred exit route for many of the PE investors – and, if SKS’s model is followed, also for the MFI’s promoters3. Indeed, today an IPO is the inspiration and ambition for a growing number of MFIs and their promoters. Valuations seem to be likely to follow a telco-based model and thus based on the number of clients on an MFI’s books – resulting in huge incentives to rollout and hard-sell standardised products without reference to the needs (or other debts) of the clients. Small wonder there is chorus of concern about the future and direction of microfinance in India.
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