The untapped demand in the huge market for financial services in India will continue to drive growth for Indian micro finance institutions (MFIs) in the year to come. Leading, as well as young micro finance companies will pursue geographic diversification and continue to find opportunities to sustain their fast growth, according to a recent report by Intellecap in its third edition of Indian Microfinance Coming of Age.
The industry?s expansion in the near term is likely to be steady, largely propelled by the sustained growth in credit outreach and is expected to remain organic. Strong regional players are likely to show moderate growth. In the coming year the sector in India could see the entry of key foreign players, ASA, which has entered West Bengal, being an example. Indian MFIs are also seeking business opportunities abroad.
Such cross-border interactions could expedite the adaptation of best practices from more mature markets to the Indian context. Rural and urban markets are both expected to grow in the next year. The higher density of population in cities make these high-growth regions and an increase in the urban portfolio on the whole is likely. MFIs will also continue to expand in virgin rural markets.
Poor under-served states, such as Bihar, Uttar Pradesh and Rajasthan, are also expected to witness a flurry of MFI activity in the next few years, given the vast opportunities which lie ahead.
While the shift to commercial microfinance is necessary to ensure commercial sustainability of the enterprise, questions of whether the business can also retain its social focus and whether MFI promoters will ever be incentivised to do so, arise. The business model of leading MFIs, including some of the most explicitly commercially-oriented institutions, is progressively breaking away from the cookie-cutter approach of standard loan products, operational processes and methods of client engagement and is resolutely becoming more attentive to the needs of the customers.
As the market matures, MFIs need to build brand equity to attract and retain customers, minimise costs and keep competition at bay. One way of doing this is to emphasise more on branding and customisation of products and services to customer needs. Some MFIs are even looking at attaching membership benefits like offering clients subsidised food rations. In serving customer needs better, MFIs are implicitly becoming increasingly social.
The Indian microfinance industry is also strengthening its place on the global business map, the report pointed out. This is not only because of the sheer size of its market (estimated at $72 billion) but also because of the high level of interest that the sector has elicited from a diverse set of investors and strong operational and financial performances by microfinance institutions in the country.
The industry is estimated to surpass 110 million borrowers and $30 billion in loan portfolio by 2014?this will require a huge capital inflow, both debt and equity. The growth is expected to come from underserved states and also from a range of new financial and non-financial products that are being introduced in the sector.