Friday, April 29, 2016

Microfinance Institutions in India: Are They Reaching the Poorest of the Poor?

Microfinance institutions (MFIs) are losing the faith of poor and, particularly poor women, as they are progressively heading towards the commercialization of their operations. It is, therefore, immensely important that we measure social and financial efficiency of these institutions and analyse what went wrong with them.

In the News
Does it make sense for microfinance institutions or banks to open a branch to reach out to remote areas? What about the cost? Is technology the answer? What is the right model for financial inclusion in India that delivers value to the customer and manages the portfolio of the lender as well?
Some of the top leaders from the banking and microfinance sector brainstormed on these ideas during a panel discussion on “Inclusive Finance: Last Mile Connectivity is the Key” at the South India Banking Conclave organised byMint in Bengaluru on Friday. Read more
Live Mint, 29 April 2016 
With the increasing commercialization of microfinance, operations debate on sustainability and outreach of MFIs in India is also gaining ground. Financial sustainability approach or institutional approach focuses on the sustainable operation of MFI by charging reasonable rate of interest to cover the costs of lending. This approach emphasizes on increase in revenues from interest income and fee and cutting down the operational cost.

Institutional approach asserts financial sustainability holds the key to serve the large number of poor. On the other hand, the poverty lending or welfarist approach supports loans to the poor at the rate affordable to them. Lending to poor is a relatively costly affair, as they frequently need loan of small amounts. Thus, as per this approach, reaching the poorest of the poor, as better known as the depth of outreach and achieving sustainability goes against to each other.

Efficiency of production units lies in the judicious use of inputs to produce maximum output. Efficiency in microfinance as how well an MFI technically transforms inputs (such as assets, staff and subsidies) to produce the maximum outputs (such as number of loans, financial self-sufficiency and poverty outreach).

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