Building Sustainable Microfinance Institutions in India

This paper examines the factors that prevent Indian microfinance institutions (MFIs) from becoming sustainable, and also looks at solutions to these hurdles. The paper discusses:

A three-track approach for building a sustainable microfinance sector. This includes:

• Providing incentives to existing mainstream financial service providers to enter the microfinance sector as a serious business proposition;
• Encouraging new MFIs with a supportive policy and regulatory framework, and financial resources to expand their services;
• Building a strong-demand system in the form of community-based development financial institutions (CDFIs).

Multiple dimensions of sustainability that include:

• Demand and supply characteristics and their impact on sustainability;
• Sustainability of the mission of MFIs;
• An enabling legal and regulatory framework;
• Ownership and governance characteristics;
• Financial sustainability.

The paper concludes with suggestions for building sustainable MFIs in India. These include:

• Amending certain laws and regulations;
• Establishing a new form of a non-banking financial company the microfinance company;
• Permitting MFIs to take deposits from borrowers;
• Extending tax benefits to the microfinance sector;
• Making available more lending funds to MFIs;
• Simplifying foreign investment regulations to enable MFIs to raise foreign equity.