Thursday, December 8, 2011

Microfinance Industry in India specific to Indian agricultural needs; an Industry Analysis

The MFI industry in India has shown strong growth in the past few years with an upward movement from $0.8 billion in outstanding loans in 2006 to $6.7 billion in 2010. This, along with the strong support of the Indian government for micro-finance, indicates that the industry will continue to see significant growth in the future. Currently, there are more than 3,000 MFIs in India and the 10 biggest organizations represent 75% of the market. This data, the potential growth opportunity, and the size of the untapped market (only 5% of people in Uttarakhand have access to microfinance) suggest that entering this market will be feasible and potentially rewarding (social and financial). In order to be successful within this industry, an organization needs to be well financed and needs to overcome barriers including trust and acceptance of customers.

The major MFI competitors in India include Bharatiya Samruddhi Finance Limited, Share Microfin Ltd, Sa-Dhan Ltd, SKS Microfinance Ltd., International Development Enterprises (IDE), Bandhan and Gram Utthan. While these pan India organizations provide financial assistance to rural areas, they are primarily focused on urban communities; further, their missions are broad and do not specifically cater to the needs of agricultural customers for capital intensive projects. The ticket sizes for loans by the existing MFI’s are considerably lower, have very short payback period and are hence not suitable for capital intensive projects like Micro irrigation. This is especially true for states in north India including Uttarakhand. Further, there is a problem with bank loans as they require collaterals like agricultural land for the loan to be provided.

Additional competitors include other financial service providers, including local Indian commercial and development banks as well as self help groups, cooperatives, and other community savings and loan programs. Some agricultural input suppliers are also beginning to offer financial services and credit for inputs to agriculture. However overall the niche of agricultural financing that we will focus on is very much in its infancy and has a huge untapped potential. 

Microfinance lenders hold the majority of the power due to the extreme needs of customers requiring financial assistance. With the maturation of the microfinance industry, borrowers have started getting the ability to obtain loans from multiple organizations, though even now with the tremendous demand and limited amount of money to lend; this ability is not significant in most parts of the country.  

There is also a problem of supplier network for Drip Irrigation systems in India which further increases the cost of supplying such systems. In fact, the Indian government has identified the areas where this is a problem in categorizing the country in 3 categories of A, B, C with higher levels of estimated cost of drip irrigation systems in B & C to the tune of 15% and 25% higher respectively. These higher increases are due to the problems of farmer awareness levels, proximity to the manufacturing units, distance in transportation, and cost of drip irrigation systems itself.