EMERGING ISSUES OF MICROFINANCE

REQUIREMENTS AND CHALLENGES FACED BY MICROFINANCE INSTITUTIONS

1. COST OF OUTREACH - reaching the unbanked populations of the world means servicing
small loan amounts and servicing remote and sparsely populated areas of the planet, which
can be dangerously unprofitable without high rates of process automation and mobile
delivery.
2. LACK OF SCALABILITY -smaller microfinance systems often struggle to preserve the
profitability and performance in these markets, as FI's experience high growth rates that result
from getting the service delivery right. This results in thwarting the growth of these
organizations.
3. QUALITY OF SHGS (SELF HELP GROUPS) - Due to the fast growth of the SHG-Bank
Linkage Programme, the quality of MFIs has come under stress.
This is due to various reasons such as:
a. The intrusive involvement of government departments in promoting groups
b. Diminishing skill sets on part of the MFIs members in managing their groups.
c. Changing group dynamics.
4. Geographic Factors - Around 60% of MFIs agree that the Geographic factors make it
difficult to communicate with clients of far-flung areas which create a problem in growth and
expansion of the organization.
5. Diverse business models - Supporting the very wide range of features and lending activities
is difficult and requires a considerable amount of cost and efforts.
6. HIGH TRANSACTION COST - High transaction cost is a big challenge for microfinance
institution. The volume of transactions is very small, whereas the fixed cost of those
transactions is very high.
7. LIMITED BUDGETS – Making provisions for large upfront investments is not possible for
most of the MFIs which limits their capability to purchase world-class banking solutions that
can help them fulfil their requirements and support their growth targets.
8. KYC AND SECURITY CHALLENGES – The customers serviced by Microfinance
instructions are usually the ones having none or very limited official identification or able to
provide tangible security, this makes it extremely difficult for institutions to offer any banking
services.
9. FINANCIAL ILLITERACY : One the major challenge in India towards the growth of the
microfinance sector i.e. illiteracy of the people. This makes it difficult in creating awareness
of microfinance and even more difficult to serve them as microfinance clients.
10. LACK OF INFORMATION : There are various sources of credit information in India, but
none of these focuses on small, rural borrowers. Credit information on such borrowers is
difficult to obtain because the majority of the rural poor rely on moneylenders and other
 informal lenders, and it is not in the interest of such lenders to pass on a borrower’s good
credit repayment record to other providers of finance.
11. INABILITY TO GENERATE FUNDS: MFIs have inability to raise sufficient fund in the
microfinance sector which is again an important concerning challenge. Through NBFCs are
able to raise funds through private equity investment because of the for profit motive, such
MFIs are restricted from taking public deposits.
12. INTEREST RATE: MFIs do not get any subsidized credit for their lending activities and that
is why they need to recover their operational costs from borrowers
13. HEAVY DEPENDENCE ON BANKS & FIS: MIF’s are dependent on borrowing from
banks & FIS. For most of the MFI’s funding sources are restricted to private banks & apex
MFI’s. In these available banks funds are typically short term i.e. maximum 2 years period.
Also there is a tendency among some lending banks to sanction and disburse loans to MFI,s
around the end of the accounting year in pursuit of their targets.
14. WEAK GOVERNANCE: Many MFI’s are not willing to convert to a corporate structure;
hence they trend to remain closed to transparency and improved governance, thus unable to
attract capital. MFI’s also facing a challenge to strike a balance between social and business
goals. Managements need to adapt business models based on changing scenarios & increased
transparency; this will enable attracting capital infusion and private equity funds.
15. REGIONAL IMBALANCES: There is unequal geographical growth of Microfinance
institutions and SHGs in India. About 60% of the total SHG credit linkages in the country are
concentrated in the Southern States. However, in States which have a larger share of the poor,
the coverage is comparatively low. Main reason for this is the state government support, NGO
concentration and public awareness

over-dependence on the banking system,

illiteracy and lack of awareness about the products.

MEASURES TO OVERCOME CHALLENGES

1. Proper Regulation
2. Field Supervision
3. Encourage Rural Penetration
4. Complete Range of Products
5. Transparency of Interest Rates
6. Technology to Reduce Operating Cost
7. Alternative sources of Fund