India Knowledge@Wharton writes:
In India, the history of rural finance is typified by the image of a nationalized banking system which has failed to deliver credit and, if it has, not been able to recover it. Microfinance, by contrast, is increasingly being seen as an innovation in lending and the panacea for rural India’s indebtedness to money lenders.
The recent focus on microfinance in India marks a paradigm shift in orientation. The recipients of state-sponsored subsidized loans in the early 1980’s, 75 million poor households today have become the driver of new assets. While no accurate estimate of the size of the Indian microfinance market exists, M-CRIL (Micro-Credit Ratings International), a leading micro credit rating agency based in Gurgaon, puts the estimated demand at Rs. 480 billion ($10.7 billion). That is calculated for 60-70 million households at an average household credit demand of Rs. 8,000 (less than $200).
Indian banks may soon saturate high- and middle-income customers with retail loans and home loans, and are under pressure to move to low-income and even poor households. To do this, they are choosing to partner with MFIs, most of which have current recovery rates of over 96%. Foreign banks with little or no presence outside India’s major metros are also looking to work with MFIs to secure their micro-lending market shares.