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Microfinance and Capital Requirement

The demand situation in the microfinance market can be gauged from the Table 2

Table 2: Demand for micro-lending in Indian

Source: Microfinance India (mFI) 2007

Given these figures there is need for broad basing the reach of financial services to the people falling in the low income category, help them invest in and benefit from their skill sets and tide over the impact of adverse shocks in the process. The intentions might sound quite philanthropic however microfinance is turning out to be a profitable market for commercial banks which is quite evident from their presence in this area. The new commercial banks do not have the infrastructure to ensure the last mile connectivity and have to rely heavily of microfinance institutions (MFI).

MFIs face the impediments of high cost of service associated with the low-value, high volume and cash intensive nature of the business and the high fixed and variable costs associated with putting in place the physical infrastructure required to broaden the reach. The presence of high transaction costs is compounded by the fact that MFIs are not capital rich. The MFIs have begun to graduate from grant based organizations to capital based organizations. Equity and Securitization came forth as good methods of sourcing capitals for the microfinance initiatives. In this article we concentrate on the pros and cons of securitization of microfinance loan portfolio. Banks like ICICI have been at the forefront of microfinance securitization.

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* Contributed by: -
Raghavendra Badaskar,
PGP II,
T. A. Pai Management Institute, Manipal.