The increasing regulations are likely to hit the profitability of microfinance institutions.

Mr Viren H. Mehta, Partner, S. R. Batliboi & Co., said this while delivering the third V. Sitaram Rao Memorial lecture on ‘Metamorphosis of Microfinance Industry’ here on Wednesday.

An interest cap and other regulations might ‘severely restrict profitability’ due to high cost of funds, he said, adding that the long-term prospects for the industry continued to be good.

Other challenges for MFIs would be reduced trust among the customers, decline in bank funding and systemic issues in transparency and corporate governance.

In countries such as Peru, lack of competition from subsidised loans from public sector banks and favourable regulation led to growth of MFI-led financial inclusion, he said.


Reinventing products and distribution chains might give an impetus to MFIs, Mr Mehta said, suggesting that they could tie-up with the vast network of post-offices for operations. “A post-office is perceived as a much safer agency and its appeal is more in north and north-eastern India,” he added.

There is a ‘huge opportunity’ for micro-lenders in northern States than in the much-penetrated southern markets.

Of the 700 million people in the country who need financial services, only 150 million had access to some sort of credit now, Mr Mehta said.

The proposed Microfinance Bill, if enacted, would create a conducive environment for the growth of the sector, he added.

Mr S. Dilli Raj, Chief Financial Officer, SKS Microfinance Ltd, said one of the causes for the microfinance crisis of 2010 was absence of moderation on the part of some MFIs.

Sitaram Rao was a former chief executive officer of SKS Microfinance Ltd.