Microfinance in India: Built on Sales Targets or Loyal Clients?

MicroSave's India Focus Note 42 highlights challenges arising from the increasing growth and commercialization of microfinance in India.

Priority sector lending requirements set out by the Reserve Bank of India have fueled the commercialization of microfinance in India. This had led to:

• Entry of private equity investors with short-term goals;
• Focus on horizontal growth;
• MFI expansion out of their original states or regions into new areas that they understand poorly;
• Undesirable practices such as poaching in pursuing clients and staff;
• Focus on large scale replication of simple and standardized systems and decrease in research, product development, and roll out;
• Mono-product environment;
• Deterioration in the relationship and loyalty between clients and MFIs.

Understanding the needs of clients is the key to addressing the problems of multiple borrowing and over-indebtedness. MFIs in India could graduate clients into individual lending relationships, tailor credit services according to client needs, diversify their range of services and use technology such as mobile-banking to deepen their relationship with clients, and increase client loyalty and commitment.