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New Challenges in Microfinance – Raised Expectations

The microfinance sector has experienced rapid growth, with annual rates around 45% and over $2 billion in outstanding loans. More than 3 million families now benefit from financial services through various institutions. Despite low default rates and the backing of commercial banks, challenges persist, including governance issues, competition, and the demand for better client support and transparency. Recent developments include increased investor interest and a focus on underserved states, ensuring that microfinance becomes a mainstream tool for poverty alleviation and empowerment. ###

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New Challenges in Microfinance – Raised Expectations

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  1. New Challenges in Microfinance – Raised Expectations

  2. The story so far • Fast annual growth of about 45% • Total outstanding of over $ 2 billion • Over 3 million families have access to financial services • A wide variety of institutions as well as operating models • Viable business well supported by commercial Banks/regional rural banks • Very low defaults with PAR>60 days at 1.77% • Operating cost ratio at 15.43% (Asain ratio at 18.7%) with average OSS at 105%

  3. More recent developments • New investors interest- Four mf venture funds-Bellwether, Lok capital, Unitus, Aavishkar • New equity funds from NABARD/SIDBI • Special focus on underserved States • The microfinance sector (development & regulation) bill-2007 • Increasing competition • Coverage of urban poor • New national enthusiasm in microfinance platform

  4. Support infrastructure • Effective coordination & networking role of Sa-Dhan- a network of about 200 MFIs • Two rating institutions of repute • Four nurturing/financing institutions for start ups • Around 10 capacity building institutions • Microfinance now an integral part of rural finance courses in management institutions/universities • State level CB institutions in making

  5. The new challenge • Andhra crises in 2006 has raised several issues • Question behind the basic objective of microfinance. • The major issue of reasonable (effective) interest rate • Demand for holistic support to clients • Objection to the no tolerance policy towards defaults

  6. The new challenge (cont.) • Effectiveness of microfinance in poverty reduction • Demand for social security cover for clients such as life, health & asset insurance, old age pension etc • Demand for micro-enterprise & livelihood support services for MF clients • Higher individual loans to mature Mf clients & non poor not served by the formal sector

  7. The challenge of governance • Transparency in operations & reporting • Ethical practices & better treatment to clients • Composition of Board & its ability to lead • Family hold on the institutions • Weak second line of management • Increasing competition • Inadequate MIS & internal audit system not compatible with fast growth

  8. HRD challenge • No regular supply of trained manpower yet • Reliance on adhoc in-house training infrastructure • Substantial investment required in building professionals/consultants • Development of faculty • Absence of books/literature on good practices/indian case studies

  9. Equity challenge • No concept of net owned funds • Very little promoter/community stake • Partnership model/Banking correspondent no good substitute to adequate debt equity ratio • Bankers now showing signs of reluctance for large loans for low net worth institutions • Proposed legislation unfortunately favour non- corporate community structures

  10. Some other challenges • The gender challenge • The efficiency challenge • The regulatory challenge • The technology challenge • The livelihood challenge • Client education challenge

  11. Conclusion • Microfinance gradually melting into national mainstream as a cost effective welfare tool for poor, women, tribals, underserved- much more than a much needed financial service to all those left out by the formal sector

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