For India's Microfinance Institutions, Governance is the Key to Sustained and Scalable Growth

This issue of Ratings Direct highlights the challenges that governance issues pose to the sustainability of Indian MFIs. It also discusses CRISIL's assessment and grading of MFIs, difficulties MFIs experience in balancing their financial and social objectives, and the future of MFIs in India. The paper states that a minority of MFIs in India are setting industry standards and benchmarks in governance. The majority need to strengthen their governance architecture if they wish to survive and grow. Key points include:

• CRISIL provides risk assessment and diagnostic services for MFIs to measure, manage, and mitigate their risks;
• Microfinance has become a key activity for several NGO-MFIs due to the drying up of donor and grant funding;
• These MFIs have not equipped themselves to manage this evolution, with the result that governance, disclosure, and accountability have suffered;
• Benefits of good internal control systems will materialize only if they make board and management changes to include a reasonable commercial orientation in their mission;
• Indian microfinance will not be able to develop in a sustainable fashion, unless MFIs bring about some fundamental shifts in their governance architecture.