Market Opportunity

On the face of it, India has a deep financial system. Financial assets amount to about 137 per cent of GDP in India. India also has a very large network of 66,500 commercial bank branches of which almost half are in rural areas. As a result, India compares favorably in terms of branch density (average population served per bank branch); a bank branch for every 15,000 people. Despite this, the Indian financial system has failed to provide access to the poor, especially the rural poor. Almost 60% of households do not have access to a bank account; only 20% of rural households have access to credit from a formal source.

An estimated 300 million Indians live below the poverty line, of which about three –quarters live in rural India. By March 2006, outstanding of Microfinance loans stood at USD $2 Million with an outreach of 40 million clients. This amounts to less than 20% of the estimated demand. If those living near the poverty line are also included, it is estimated that upwards of 320 million Indian poor do not have access to credit today. As such, debt and equity funding are now both gearing up to serve the sector. With respect to equity specifically, M-CRIL projects the need for 1,090 Crores (~$270 Million) of equity till 2010, for MFIs to maintain reasonable capital adequacy at current growth levels. (Source: M-CRIL, Financing Microfinance in India, April 2006) 

The full potential of the Indian Microfinance sector remains unexplored. The Indian Government’s interventions in this sector have had moderate success and, even with a growing number of NGOs (Non-Government Organizations) venturing into micro finance, the reach and scale of these initiatives remains limited compared with the estimated demand for micro credit. Perhaps the single biggest obstacle to scalability in this sector is not a shortage of financing, but rather a lack of commercial orientation. Most Indian MFIs now have access to some debt financing if not from commercial banks, then from public sector intermediaries. Although many are still constrained by the lack of equity capital, almost all MFIs suffer from an acute shortage of management talent and perspective.

The real bottleneck to the growth and sustainability of the Microfinance sector in India comes at the level of intermediaries and delivery agents. The intermediaries are intermediating credit to low income households on a non-commercial basis – this segment of their business operations is not sustainable and would become even less so if they were to be burdened with the task of really scaling up their interventions in the Microfinance sector. At the level of the delivery agents, there is very limited absorptive capacity. NGO delivery channels are tough to scale up. For one, being grant financed, NGOs often run into funding fatigue after they reach a certain size. But more importantly, their institutional culture and mind-set is often ill suited to create service delivery organizations of scale – NGOs are very effective in serving the needs of small communities of clients, but are unable to serve large populations efficiently.

The challenge lies in attracting for-profit financing sources to fund the delivery of affordable financial services to the poor but in a way that is commercially viable and scalable.