What does Competition Mean for Indian MFIs?

This note states that as competition in the Indian microfinance industry heats up, Indian MFIs must shift their thinking to respond to different challenges.

The note states that:

• Indian MFIs should learn from the experience of other countries like Bangladesh, Bolivia and Uganda, where microfinance markets are highly competitive;
• In a competitive environment, the following aspects of the MFI undergo changes: objective, internal focus, driving motivation, growth, market assessment and client demand.

The paper reviews lessons learned in Bangladesh, Bolivia and Uganda and recommends that Indian MFIs:

• Deal with over-indebtedness by:
  • Creating arrangements such as credit bureaus,
  • Providing protective financial services,
  • Diversifying the range of promotional financial services.
• Move away from group-based lending methods and towards individual lending as clients become more demanding;
• Identify and focus on less contested market niches;
• Build differential based on price, when operating in highly competitive market niches.

Finally, the paper states that:

• Highly competitive environments present risks both for the MFIs and their clients;
• MFIs may adopt less stringent loan approval criteria or be forced out of their traditional markets into new ones;
• Client may be tempted into a situation of over-indebtedness to access multiple loans from several providers; a behavior that is of great concern in the Indian context.