Microfinance in India: Current Trends and Challenges

This paper argues that there is an urgent need for structured long term financing to the microfinance sector in India in order to fully address issues such as growth management, regulatory hurdles and political risks, and enable the transition into a well functioning, mature industry. The paper discusses:

• The supply of and demand for microcredit in the Indian market and the potential for the growth of microfinance;
• Structures that include credit delivery models, regulation and legal forms and financing models;
• Some features of the Indian microfinance market such as market leaders, efficiency, productivity and outreach, asset quality, leverage, etc;
• Growth strategies such as extending the self-help-group (SHG) Bank group linkage;
• Sectoral challenges in the areas of human resources, products, transaction costs, technology, finance, geographic concentration, regulatory and political issues;
• Changes and trends in policy.

The paper concludes that:

• The most important point to remember is not past successes or present impediments, but the future potential of this market;
• Rural India has the potential to become a US $5 billion market by the year 2020;
• Microfinance institutions (MFIs), banks, lender and investors need to have the tenacity and dexterity to retain their first mover advantage.