MFIs need to reinvent themselves to stay relevant

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: The microfinance institutions (MFIs) in India have much to be proud of. From a humble beginning in the mid-nineties, theirs has been an uphill task in building credible institutions that can serve the poor in a way that most banks could not. They faced many a challenge, be it convincing the poor to buy their services or cynical banks to buy their story and lend. Over the years, the banks discovered that their trust was not misplaced. Quite to the contrary, they found themselves having discovered a remarkably strong asset class.

The financial crisis too, which decimated many a giants in the global financial services sector, left the MFIs untouched and vindicated. Once the banks voted with their money, the investors were not far behind. Impressed with the stunning returns on equity promised by the MFIs, they were quick to loosen their purse strings even at eyebrow raising valuations. The MFIs, even those that began as NGOs, incorporated as trusts or societies, not wanting to be left out of the golden opportunity of attracting investments, raced to transform themselves into NBFCs.

It would seem at first glance, therefore that all is well with the world of microfinance and the MFIs are set to claim their rightful place under the sun. But if failure is the stepping stone to success, so does success contain the seeds of failure. Before the world heals itself of the wounds of financial crisis, which incidentally, was just a case in point, it’s perhaps worthwhile to introspect.

So, what exactly are, to borrow a phrase made popular by Consultative Group to Assist the Poor (CGAP), are the banana skins that can trip the MFIs in India? A comprehensive answer is a hazard I would not attempt, simply because the landscape of MFIs is too diverse for any answer to hold true for all. Besides, it will be an unwieldy long list. Instead, I’ll recount some concerns of a banker that may well have kept me awake at night, had I not been genetically coded to be a sound sleeper.