Risks and Opportunities in Micro Finance

Microfinance has emerged as a potential area that could allow people with low income an increased access to financial intermediation services. There are many MFI initiatives that have succeeded in their endeavour of providing better access to financial services to the poor. However, legal conundrum leading to a multiplicity of delivery structures and capital constraints, present a formidable challenge to the microfinance practitioners in scaling up their operations. At the same time, opportunities for the sector emerge from the increasing visibility of the sector’s impact, improved policy support, liquidity in the economy, benign interest rate regime and a willingness among banks to lend to MFIs.

While a few lenders/investors have been apprehensive of actively investing into the microfinance sector, there are others who have successfully and profitably engaged MFIs. Banks have taken initiatives to partner with MFIs in developing innovative credit delivery mechanisms for the poor. Securitization is another important initiative that provides a possible role for financial markets to participate in the microfinance sector. Thus, there is a need to unravel the microfinance universe in a manner that allows lenders/investors to gain insights into the opportunities as well as the risks in the sector, and also learn from others’ experiences.

A comprehensive dialogue on factors that are likely to influence choices made by Banks and other Financial Institutions regarding their investments in the microfinance sector is required to fill in the information gap that exists within the main stream financial sector. In particular, the following issues need to be analyzed:

· Role of Mainstream Financial Sector in addressing the issue of capital flows to MFIs;
· Perceptions of risks as well as opportunities;
· Innovations in the microfinance sector such as:
o Securitisation and takeover of MFI assets by banks,
o Credit enhancement and Rating of securitised MFI assets,
o Secondary markets for derivatives developed from securitised MFI portfolio,
· MFI regulation – legal issues affecting MFI participation in formal financial markets;
· Compliance standards and disclosure norms for MFIs;
· Capital adequacy and solvency requirements for MFIs, vis-a-vis their need to mobilise savings;
· Building MFI’s internal capacities.

Such a dialogue can take place in a one-day seminar which has representatives from banks, as well as regulatory agencies such as RBI and SEBI.