Consolidation of MFIs: Need and Challenges
This MicroSave India Focus Note examines the potential for consolidation in the Indian microfinance sector.
The growing demand for microfinance in India and the increasing number of players in the industry have created a need for inorganic growth through mergers and acquisitions. Consolidation through mergers and acquisitions has several advantages including lower cost of funds, shared resources, faster client acquisition, better synergy, increased market share and economies of scale. However, the article identifies several challenges for Indian MFIs entering a consolidation, especially the acquirer. These include:
- Valuation problems due to absence of listed MFIs in India;
- Cultural differences between organizations;
- Arranging funds for buying the target firm given the reluctance of banks to lend for buy-outs;
- Clash of management styles.
The article concludes that a successful consolidation that maintains the balance between financial performance and people aspects can create excellent synergies for the MFIs involved.
