Experts following the growth of microfinance in India say that the sector is headed toward a phase of consolidation, and expect to witness a series of mergers and acquisitions. Originally reported by The Wall Street Journal’s Livemint, it is expected that consolidation will occur amongst smaller MFIs in order to compete with India’s microlending giants. Currently, the top 25 microlenders in the space account for 75 percent of total microlending, creating a strong imperative for small MFIs to join forces.  It is expected that MFIs serving less than 5000 clients will need to engage in consolidation.

The need to consolidate also stems from a desire amongst small MFIs to attract new investment. With Indian microfinance serving only 7 percent of the market, MFIs are desperately seeking new capital to scale up. To attract capital, consolidation is necessary because investment firms are more likely to consider larger scale MFIs that demonstrate a greater capacity to increase outreach.

Microfinance in India has witnessed dramatic growth in recent years. According to an Intellecap study, between 2003 and 2007 India’s 60 largest MFIs – which constitute 95% of all lending – experienced a cumulative annual growth rate of over 70 percent, and an average increase in return-on-equity from 2.2 percent to 33.2 percent. As of March 2007, these MFIs served nearly 10 million clients and held a cumulative outstanding loan portfolio of USD 769 million.

For other MicroCapital stories tracking Indian microfinance, please click here.

By Ryan Benson, Research Assistant

Additional Resources:

Livemint: Microfinance firms seen heading into a phase of consolidation

Symbiotics: India: Microfinance firms seen heading into a phase of consolidation

MIX Market: Country Profile for India

Microfinance Gateway: A Primer on Microfinance in India