Fate of microfinance industry in the wake of license to small finance banks

Fate of microfinance industry in the wake of license to small finance banks
Highlights

Microfinance (MF) companies give loan to underprivileged people to work their way out of poverty. These loans are given so that they can start small businesses and earn a respectable living. The loan needs to be paid in installment on a weekly basis and none of the loans come with less than an interest rate of 20%.

Microfinance (MF) companies give loan to underprivileged people to work their way out of poverty. These loans are given so that they can start small businesses and earn a respectable living. The loan needs to be paid in installment on a weekly basis and none of the loans come with less than an interest rate of 20%.


Coming to the newly licensed small finance banks, they might be in a better position to issue loans at better interest rates. However, one thing that needs to be seen is how they will approach the clients. How many branches would they open and what would be the ratio of branches to the population. Banks will have to invest heavily in mobilizing staff, infrastructure and IT which is key element. One advantage though with banks is that loan recovery rate will be high as there won’t be any political influence.

Considering the RBI guidelines and other rules banks have to adhere to, it would be interesting to see how long it would take to approve aloan. No doubt most of the licensees are from microfinance background, but serving clients through a bank will be a different ball game with new set of rules altogether. They will be under constant scrutiny and it will take a while to learn the tricks of the trade.

In a country such as India where infrastructure challenges such as roads, phone/net connectivity are galore, it will be difficult for banks to gain traction immediately. MF companies should use this time and come up with innovative ideas to penetrate much further and keep ahead in the race. Besides providing loans, MF companies should also help the clients in marketing their products. May be MF companies need to partner with vendors to get the products to the market so as to improve their business potential. This kind of act will create an undisputed image and loyal customer base. In addition, loan recovery rate too will improve.

In short, small finance banks may not be able to cause much of a danger to microfinance institutes in near future.

By Saradhi
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