Mr Ganesh Sankaran, executive vice president of India’s HDFC Bank, argues in a recent article on the Hindu Business Line website that the microfinance industry has reached a bifurcation point wherein its stakeholders must navigate it towards achieving either commercial sustainability or poverty alleviation.
He suggests that the microfinance industry must consider the following four dimensions if it is to mature into a full-fledged industry: (1) profit motive; (2) quality of relationships with end borrowers; (3) risk management; and (4) business models. First, the author suggests that industry players must be explicit in distinguishing between seeking a modest profit and “profiteering”, which may lead to exploitation. Second, the author remarks that in pursuit of greater efficiency and growth, microfinance institutions (MFIs) should consider their strategy to maintain quality customer service. Third, the author recommends that investors design a risk management system to avoid an oversaturation of equity and debt investment in larger MFIs. Fourth, the author raises the concern that MFIs may find it increasingly challenging to maintain a grant-led model given the steadily increasing demand for loans from end-borrowers.
Alternatively, Mr Sankran also proposes a hybrid model that “judiciously blend both [profit-making and poverty-reduction] in an efficacious mixture that works for all stakeholders.”
By Jacqueline Foelster, Research Associate
About HDFC Bank: Incorporated in India in 1994, HDFC Bank offers treasury, wholesale banking and retail banking services. HDFC Bank does not report to US-based nonprofit Microfinance Information Exchange (MIX). HDFC Bank reportedly has total assets of approximately INR 25 trillion (USD 563 billion) as of end of 2010.
Sources and Additional Resources:
[1] The Hindu Business Line, “Can microfinance attain industry status?” http://www.thehindubusinessline.com/industry-and-economy/banking/article1685100.ece
MicroCapital.org Brief, April 12, 2011, “Representatives of Cambridge, Care, Center for Global Development, SKS Microfinance Discuss ‘Does Microfinance Help People Escape Poverty?’” https://www.microcapital.org/microcapital-brief-representatives-of-cambridge-care-center-for-global-development-sks-microfinance-discuss-%E2%80%9Cdoes-microfinance-help-people-escape-poverty%E2%80%9D/
Microfinance Event, April 4, 2011, “Microfinance Crisis in India: Local and Global Implications – A Panel Discussion, April 8, 2011, Hosted by the American University, Washington DC, USA”, https://www.microcapital.org/?s=india&x=0&y=0
MicroCapital.org Brief, April 1, 2011, “Malegam Proposals on Indian Microfinance Likely To Be Ratified on April 1, Bankers Defend MFIs’ Priority Sector Status”, https://www.microcapital.org/microcapital-brief-malegam-proposals-on-indian-microfinance-likely-to-be-ratified-on-april-1-bankers-defend-mfis%E2%80%99-priority-sector-status/
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