Building Sustainable Microfinance Institutions in India

Factors that make microfinance institutions sustainable
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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.

About this Publication

By Mahajan, V. & Nagasri, G.