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The MFIs now have to be sustainable in order to function efficiently and attract more capital. Interest rates would be high as MFIs have to cover transaction costs. Larger MFIs would bring down rates as operations would become more efficient. The question of whether microfinance is profitable to commercial banks would be a premature one at this
stage as trust building, education and capacity building would take some time. Many MFIs are crossing over the hump of sustainability with volumes and IT inputs. With the Microfinance Bill pending in the parliament assuming no state intervention on interest rates more efficient MFI operations can be anticipated.

The paper discusses the profitability of commercial banks in microfinance space in the backdrop of microfinance being considered as priority sector lending. Commercial banks are partnering with the MFIs to extend rural credit, hence, the paper argues that profitability of commercial banks lies in the efficient and sustainable operations of MFIs. The paper will also broach the issues of rapid commercialization of the microfinance space, and questions whether microfinance is a panacea to the poor.

Demand & Supply Equation in the Indian Microfinance Market

There is no reliable source or database of all microfinance institutions or no reliable aggregate data is available on microfinance market for India. Agencies like Microfinance India, M-CRIL, and The Mix Market indicate tentative figures of the demand for microfinance in India. M-CRIL, a leading micro-credit rating agency, provides a conservative estimate for the annual demand at Rs. 480 billion based on 60-70 million poor families with an average household credit demand of Rs. 8,000 (less than $ 160). Another estimate is given by the agency Microfinance India as give in Table 1.

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