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New Challenges in Microfinance – Raised

Expectations

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%

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

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

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

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

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

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

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

Some other challenges

• The gender challenge• The efficiency challenge• The regulatory challenge• The technology challenge• The livelihood challenge• Client education challenge

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