Microfinance institutions are struggling for survival. Here’s why

Four summers back, the plain-speaking Reserve Bank of India deputy governor KC Chakrabarty declared in a Kolkata conference that micro lenders may become irrelevant if banks turn efficient. Come 2017, with four of the 10 largest microfinance companies turning into small banks, and the second largest— Bharat Financial Inclusion— set to dissolve into IndusInd Bank, Chakrabarty’s words are turning out to be prophetic.

Two decades after India-born American citizen Vikram Akula founded SKS Microfinance, which was rechristened as Bharat Financial, the industry that delivered livelihood to millions of poor is facing its pincer moment with private banks giving a big push to micro lending.

The business model — propounded by Nobel laureate Mohammad Yunus and successfully implemented in India by Akula and Chandra Shekhar Ghosh — still remains profitable, but the vagaries of regulations and populist politics like farm loan waivers keep them on the edge.

The tiny size of these institutions makes them vulnerable to even a small adverse development as their finances remain fragile. Unlike banks, which have multi products and an assured deposit base, micro lenders are dependent on markets for funds, which turn hostile at the smallest of events that affect business.

“Today banks are equally in the microfinance space as much as we are,” says MR Rao, managing director with Bharat Financial Inclusion. “So, banks are looking to partner MFIs either as subsidiary or by way of strategic stakes. As MFIs grow, they too need capital badly to remain on the growth path. It will be difficult for pure-play MFIs to grow independently without support of an anchor investor.”

Microfinance institutions (MFIs) came into being in the 90s as banks’ reluctance to lend to those without credit history provided an opportunity to those willing to take risk and organise rural communities.

Though the gap still exists, the likes of Axis Bank, HDFC Bank or RBL Bank are developing their own ecosystem to reach out directly to the poor for higher returns. There are pockets of oversupply squeezing growth potential for the pure-play micro lenders.

India has some 223 MFIs, including societies and NGO-run entities, and 168 of them are registered with Sa-Dhan, the association of community development finance institutions. There are 47 non-bank finance company-micro finance institutions (NBFC-MFIs) registered with Microfinance Institutions Network (MFIN), an industry body, covering 90% of the portfolio While the top 10 find it easier to get equity or bank loan, the smaller ones are always at a disadvantage.