Competition in Indian Microfinance
By Karuna Krishnaswamy | Karuna Krishnaswamy is a research associate at the CMF. He is currently working on a project to assess the implications of competition on borrowers' repayment performance.

http://www.ifmr.ac.in/cmf/eomf5-competition.html

Background In the past few years, Indian microfinance has seen unprecedented growth. For instance, during 2005–6, major Indian microfinance institutions (MFIs) were able to expand their active borrower base by about 110 per cent making the sector one of the fastest growing world wide. Loans outstanding of Sa-Dhan's members almost doubled from Rs 1095.1 crore to Rs. 2070.2 crore during the same time period. In fact, in 2005, five leading MFIs from India ranked in the list of top 20 fastest growing MFIs in the world.1,2 This trend was reinforced by and in turn further accelerated the commercialization of the industry. Commercialization is characterized by increased competition for clients and a clear objective to seek profitability. The majority of India's top 25 MFIs already are, or are working to become, profit-oriented NBFC–MFIs (Non-bank finance company–microfinance institutions). Despite the growth, there is considerable unmet demand for credit in India. According to a World Bank report, only 9% of poor families in India are covered by microfinance. Of the projected credit requirement of $10909 million, only $1050 million is met by microfinance.

Although the demand for credit is widespread, MFIs are not evenly distributed geographically. MFIs are clustered primarily in the south, with two-thirds of all MF clients being in AP, TN and Karnataka. Interviews with about twenty sector experts and practitioners suggests that fast growing MFIs tend to expand to areas where there is already an incumbent, similar to banks which tend to open new branches in more financially developed areas 3. The reason for this strategy is to leverage training and screening of client by the incumbent MFI and general awareness of microfinance in the area. MFIs in India, by and large, do not distinguish themselves by geographic areas or by offering differentiating products to different client segments. In general, competition is beneficial to MFIs and clients. MFIs improve their product lines to meet client demands; prices become lower; the quality of services provided improves; and overall, MFIs become more client-driven. In terms of governance, MFIs become more efficient and conscious of risk management issues. The effective interest rate charged is often made more transparent. Better governance complements commercialization of the MFIs. Banks and other private investors feel more comfortable investing in well-managed MFIs that adopt good governance practices. As a result, such MFIs enjoy continuous inflow of funds that makes further outreach of clients possible. Indian MFIs lead the way in access to commercial funds with a commercial funding ratio of about 75 per cent. However, a review of the literature and interviews with leading practitioners reveal the negative aspects of competition.

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