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Vol. 2 | No. 4 May | 2014 ISSN 2347-8217

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Microfinance In

India And Porter’s

Five Forces Analysis

Of Microfinance Divya Mehta

Assistant Professor, Dyal Singh College, Lodhi

Industry
Road, New Delhi - 110003

Monica Aggarwal

Assistant Professor, Ramlal Anand Evening

College, Benito Juarez Marg, New Delhi - 110021

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Abstract
Microfinance is that wing of providing finance which deals with providing financial services to the poor such
as the supply of loans, savings etc. India has witnessed a rapid growth over the last few years in microfinance
sector. In this paper, attempt has been made to study the role and growth of microfinance in India with
special emphasis on Microfinance crisis in Andhra Pradesh. Attempt has also been made to study
Microfinance through Porter‟s five forces analysis. This paper focuses on microcredit aspect of as micro
credit is still the largest function of microfinance business in India.

Keywords: Microfinance, Michael Porter five forces, Microcredit, MFI, SHG

1. Introduction
Poverty is one of the predominant problems prevailing in the developing and developed part of the world. It
is estimated that approximately 2.5 billion people around the world live in poverty. As a result, United
Nations Organisation (UNO) has committed itself to its objective of halving extreme poverty by 2015 as part
of its Millennium Development Goals. Most of the developing and underdeveloped countries have
acknowledged that poverty alleviation is an important step towards achieving sustainable economic
development and are directing their policy framework to address the same. Microfinance has gained traction
in the policymaking circles as an effective and efficient tool to bring this paradigm change in the rural
landscape.

Many credit groups have been operating in many countries for several years. Microfinance can be observed
since the beginning of 20th century whereas Muhammad Yunus, a Nobel Laureate is recognized with laying
the groundwork of the modern MFIs with establishment of Grameen Bank, in Bangladesh in 1976. This
foundation, besides addressing the UN Millennium Development Goal of alleviation of poverty, also serves
the multilateral organisation‟s other development goals including women literacy and empowerment.
Microfinance has now become a most talked about term and has been gaining lot of attention about its
growth, innovation and impact. The microfinance industry has mushroomed both in terms of borrowers and
type of products and its providers.

This is an evaluation study of micro finance in India using secondary data on SHGs and MFIs. The primary
objective of this study is to dig into the meaning and explore the role of Microfinance in India. In the above
statement Porter‟s Five forces model has been analysed in the view of Microfinance industry in India. In this
connection, the study looks at the issues of geographical spread of micro finance institutions and SHGs in
India, rise of SHGs in India, Andhra Pradesh and various models of Microfinance in India.

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2. Microfinance
According to International Labour Organisaton (ILO), “ Microfinance is an economic development approach
that involves providing financial services through institutions to low income clients.”

Microfinance means providing financial services to low income clients, including consumers and own
employed, who feel lacking behind in having access to banking and related services. Largely, it is a
commitment, the objective is to make available to all poor and near poor households a continuous, permanent
and cheaper access to a wide assortment of financial services including credit, insurance and fund transfers.
Micro finance services includes micro credit, micro pension, micro insurance and thrift services.

Microfinance because of its uniqueness to cater to the rural areas , where the banking sector is not able
accessible, is intended to play a very important role in achieving financial inclusion. Today, there are more
than 850 players in microfinance industry in India and the top five private sector MFIs reach more than 20
million clients in India.

In Indian context, Microfinance has been defined by The National Microfinance Taskforce, 1999 as “
provision of thrift, credit and other financial services and products of very small amounts to the rural, semi
urban or urban areas for enabling them to raise their income levels and improve living standards.” The basic
principles of micro finance that distinguish it from the earlier modes of credit delivery are small amounts of
credit, lack of physical collateral but emphasis on peer monitoring and focus on women borrowers.

The process of microfinance includes the following:

 Recruiting and training of borrowers to establish business.
 Extending help to form groups to provide loans
 Distributing funds for loans
 Meeting with group of borrowers to collect loan repayments and to guide their endeavours

3. Indian origination of Microfinance

Earlier than the first five year plan, i.e. in 1951, maximum of the financial needs of rural sector along with
agriculture sector were provided primarily by the moneylenders. At that time, the Reserve Bank of India was
very active in taking up cooperative movements through a variety of initiatives. The All India Rural Credit
Survey (RBI, 1954) stated in their report that “Cooperation must succeed and recommended a formalized
channel for credit delivery. The subsequent formation of „Agricultural Refinance Corporation‟ in 1963,

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nationalisation of major commercial banks in 1969 and then in 1980, setting up of Regional Rural Banks in
1975 and formation of National Bank for Agriculture and Rural Development (NABARD) in 1982 - all these
efforts by the Reserve Bank were to institutionalize the credit channel for rural sector. Within a very short
span, this experiment of subsidized credit boomeranged and as a result the tangible outcome was the increase
in Non Performing Assets (NPA). Then the realization dawned that the core issue for the poor is access to
credit and not the cost of credit. Subsequently, in the 1990s and 2000s, the micro-credit connotation with
MFI- and SHG-Bank linkage models evolved with the institutional support of the Reserve Bank and
NABARD in order to help the poor in providing credit. Microfinance in India can be tracked for its
origination back to the early 1970s when the Self Employed Women‟s Association (SEWA) of the state of
Gujarat formed an urban cooperative bank, called the Shri Mahila SEWA Sahakari Bank, with the purpose of
providing banking services to the poor women employed in the unorganized sector in Ahmadabad City,
Gujarat. The microfinance sector went on to evolve in the 1980s around the concept of SHGs, informal bodies
that would provide their clients with much needed savings and credit services. From modest initial stages, the
sector has grown considerably over the years to become a multibillion dollar industry, with bodies such as
SIDBI and NABARD devoting significant financial resources to microfinance.

4. Current Picture Of Microfinance In India

4.1 Organization Of Microfinance Institutions
Microfinance Institutions largely function under a broad assortment of legal structures.
These microfinance instituitions can be categorized as follows:
1. NGO
2. Trust
3. Sec 25 Companies
4. Cooperative Societies
5. Cooperative Banks
6. Regional Rural Banks
7. Local Area Banks
8. Public and Private Sector Banks
9. Business Correspondents
10. Non Banking Finance Company
The microfinance institutions in India can be categorized into 3 forms. These are stated below:
1. Mutual Benefit MFIs
2. Companies
3. NGO-MFIs

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Table 1: Type of MFIs

Type of MFI Number Share Legal Acts under which registered

Mutual Benefit MFIs
Cooperatives 3 0 State Cooperatives Societies Act
Mutually aided 445 57 Mutually aided Cooperative Societies Act enacted
Cooperative Societies by the State Governments
Sub total 448 57
Companies
Non Banking financial 24 3 Indian Companies Act 1956
Companies
Reserve Bank of India Act,1934
Section 25 Companies 9 1 Section 25 of the Indian companies Act
Sub Total 33 4
NGO-MFIs
Societies 199 25 Societies Registration Act,1860 or similar
Provincial Acts
Trusts 106 13 Indian Trust Act, 1882
Sub Total 305 39
Total 786 100
Source: www.nabard.com

4.2 Models Of Microfinance

Microfinance, in India, functions on two different models viz.
1. SHG-Bank Linkage Programme Model
2. Microfinance Institutions(MFI) Model

SBLP Model MFI(Grameen )Model

Groups of 13-20 members 5 member groups, with 5-7 groups forming a center.
Group formation and monitoring for some time by Group formation and monitoring throughout by MFI
NGO, but NGO eventually withdraws
Loan advanced by Commercial Bank Loan advanced by MFI
Group members trained to do record keeping and bank MFI staff does record keeping and bank transactions
transactions
Loans are given to SHGs which on lend to members Loans are given to members individually though on joint
liability basis

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Savings for 6 to 12 months needs to precede borrowing Loans are given without any prior savings period. In fact
savings cannot be collected by MFIs due to regulatory
reasons
Delivery of microcredit viewed by some NGOs as Micro credit is the main focus
secondary to goals of female empowerment and social
transformation
On adhoc basis, government subsidies are given to There is no direct subsidy element in MFIs 1
SHGs by way of grants equivalent to a part of the loan
Average loan size: Rs. 37892 Average loan size: Rs. 65193

The following table explains the loan lended and outstanding amount to MFIs by banks over a span of four
years.

Table 2: MFI Bank Linkage Programme

MFI Bank Linkage Programme

Amount in Rs crore
Particulars 2009-10 2010-11 2011-12 2012-13

No. of MFIs Amount No. of MFIs Amount No. of MFIs Amount No. of MFIs Amount
Loans disbursed by 10728.50 471 8448.96 465 5205.29 426 7839.51
banks to MFIs 779 (34% (187.4%) (-39.5%) (-21.3%) (-1.3%) (-38.39%) (-8.4%) (50.6%)
Loans outstanding
against MFIs as on 1659 13955.75 2315 13730.62 1960 11450.35 2042 14425.84
31 March (-13.4%) (178.6%) (39.5%) (-2.0%) (-15.3%) (-16.6%) ( 4.2%) (26.0%)

Fresh Loans as %age

to Loans Outstanding 76.9 61.5 45.5 54.3
(figures in the paranthesis indicates growth/decline over the previous year)
Note: Actual number of mFIs availing loans from Banks would be less than the figures shown as most of mFIs avail
loans from more than one Bank/more than one loan account.
Source: NABARD

From the above table it is observed that the disbursement of loans from the banks to MFIs has decreased by
nearly 25% in the year 2012-2013 as compared to 2009-2010.however the loans outstanding against MFIs has
marginally increased during the same span. To throw light to the above statement we can say that the MFIs
default rate is high may be due to mismatch between demand and supply

1 However both models receive an implicit subsidy as bank loans to them are considered as part of priority sector
lending requirements which banks are mandated to meet
2 The “Side by Side” report on microfinance in India published by Sa-dhan
3 The “Side by Side” report on microfinance in India published by Sa-dhan

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Table 3: SHG BANK LINKAGE

Loan Outstanding

2012-13

Loans Disbursed 2011-12

2010-11

Savings Balance

4000 12000 20000 28000 36000

Source: www.nabard.com

The above graph shows the linkage between SHG and banks in terms of loans disbursed by banks and loans
outstanding on the part of SHGs for three years. It is quite evident that the loans given to SHGs has increased
manyfold in just three years. With this we can conclude that SHGs are preferred as a source of Microfinance
primarily because it may lead to upliftment of society. In this respect the following table gives a comparison
of SHGs bank linkage and MFIs bank linkage trend.

Table 4: Loan outstanding vs NPAs( Rs crore) - bank loans to SHG & MFIs- Trends
( MFIs (NPA) figures- reported at bank level, doesn't include restructured assets)

45000 3000
39375 2786
40000 36340
2500
35000 31221 2212
28038
30000 2000
24425
25000 21561 SHG- Loan O/s
1474 1500 MFI-Loan O/s
20000
13955
13730 SHG- NPAs
15000 11450 885
1000
625
10000 823 MFI- NPAs
5009 500
5000 94
133 254
66
0 0
9 0 1 2 3
-0 -1 -1 -1 -1
ar ar ar ar ar
-M -M -M -M -M
31 31 31 31 31

The outstanding amount of loan of SHGs over MFIs is very predominant from the above graph. Loans
outstanding to both MFIs and SHGs has shown an increasing trend from 2009 to 2013. In 2010-2011 the

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NPAs have increased drastically for SHGs. This is mainly due to Microfinance crisis that happened in the
year 2010.

4.3 Policy Initiatives For Microfinance In India

The RBI has been entrusted with the responsibility of the regulatorfor the microfinance sector in the draft
manscript of Microfinance Bill, 2011 and therefore, is shouldered with the accountability of strengthening
the sector and of protecting the concern of the clients of MFIs. RBI, in the capacity of a regulator of the
microfinance sector and as the central bank of India, is expected to perform the following functions:

 Framing policy and guidelines for rural financial institutions

 Making available the credit facilities to issuing organizations
 Preparing potential-linked credit plans annually for all districts for identification of credit potential
 Monitoring the flow of ground level rural credit
 sustaining financial liberalization and generate conditions sustainable for the sector
 Prudent regulations and supervision
 Supporting the pilot projects of microfinance
 data collection and its publication
 Training and advocacy

Following are the various types of microfinance institutions which are primarily functioning in India:
Type Examples
Niche market MFIs Such as Spandan, SKS Microfinance, SHARE Microfin Ltd have scaled-up their micro
credit outreach dramatically in recent years
Private Banks Extention of financial services by ICICI Bank to the poor through a multi-prolonged
approach- Directly providing credit to Self Help Groups (SHGs), and providing whole
sale credit facilities to microfinance NGOs and NBFCs
Public Sector Banks Syndicate Bank, Andhra Bank, Canara Bank, and Indian Bank have entered the sector
ADB ADB, through its Microfinance Development Strategy, aims to ensure permanent
access to institutional financial services for the poor
PE Firms Started to eye low profile MFIs as they foresee huge potential in terms of returns from
this sector. E.g. JM Financial has investments from Old Lane Partners
NABARD and SIDBI They have been performing regulatory and promotional role providing financial
resources as credit and equity and enhancing technology knowhow of MFIs

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4.3.1 Microfinance Institutions Bill, 2011

The Ministry of Finance, Government of India, had placed the draft of Microfinance Institutions Bill 2011
online on July 6, 2011 whereby clarifying the doubts on the decision of a separate regulation for the
microfinance industry, and thereby inculcating a probability that a promotional outline for microfinance as an
instrument of financial Inclusion can now be put in place, the following table contains a concise arrangement
of vital key provisions of the bill:
Areas of Microfinance Provisions
Regulator Reserve Bank of India
Institutions covered All those offering Microfinance services including NBFCs but not
cooperatives
Jurisdiction over Institutions covered Limited to RBI-registered MFIs not to be treated as money lenders
under state level enactments
Minimum capital (net own funds) Rs. 500000 (11000$) initially
Systematically important MFIs currently If not already a company, must transform to NBFC (or Section 25
defined for NBFCs as those with assets in Company)
excess of Rs. 100 crore (22.7 million$)
Services offered Micro-credit, thrift, remittance, pension and Insurance services
Thrift Services “money collected other than in the form of current account or
demand deposits” from micro clients
Security of Thrift Creation of free reserves in unencumbered securities + first charge
over assets in favour of clients/members
Prudential Norms  Covering
 Income Recognition
 Accounting standards,
 Provisioning for bad debts
 Capital adequacy based on risk weights of assets
 Credit conversion factors for off Balance Sheet items
 Disclosure of assignments or securitizations
 Specified norms of Corporate Governance
Business Conduct Rules  Maximum amount of loan
 Term/tenure of loan
 Periodicity of installments
 Location of transactions
Pricing and Profitability  Maximum Annual Percentage Rate (APR)
 Fees, levies, insurance premiums
 Margin cap

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Client Protection Mandatory membership of credit information bureaus, adherence to

codes of conduct and transparency to clients; establishment of
advisory councils at the central and state levels
Reporting/Information Requirements The usual reporting and information requirements that facilitate
benchmarking and marking
Development Resources Establishment of Microfinance Development Fund to enable lending,
equity investment, capacity building and research.

Some of the special features of the bill are as follows:

 Though RBI has been appointed as a regulator of the sector as a whole, it can delegate any of its powers
to NABARD anytime
 As jurisdiction of all MFIs is limited to RBI, the state governments will have no control over the
functioning of MFIs and any law, suo moto enacted by them, cannot be enforced upon them
 The bill allows MFIs to offer thrift services as taking recurring and term deposits only declining clients
the flexibility of frequent withdrawals. This way, the bill make sure that MFIs can accept deposits and
thereby, has tried to bring down the cost of funds for MFIs. A provision has to be made against the
deposits that MFIs take and the rate is to be defined by the regulator.
The microfinance Institutions Bill has come at the right time when the entire microfinance sector was reeling
under the pressure from the government of Andhra Pradesh and will rescue the industry.

4.4 Self Help Groups (SHGs)

The microfinance sector has grown over the past century in India into enormous operating sizez and colour
and to a diversified degree of success. One such variation of microfinance has been the development of the
self help groups (SHG). Developed on the belief of “self help”, small groups of women was formed in groups
of fifteen to thirty members and operate on a savings-first business model whereby the member‟s savings are
used to fund loans. These small groups are called Self Help Groups (SHGs). The appraisal of outcome of
cooperatives by All India Rural Credit Survey Committee in 1954 bought the fact that volume of credit
supplied by the cooperative movement was insignificant, accounting only 3% of the total borrowing of
cultivators. It expressed that the proportion of institutional agencies, comprising the Government , the co-
operative and commercial banks in financing the borrowings of rural household was only 7.3% in 1951-52
corresponding to the share of private money lenders was high as 68.6%4. The nationalization of SBI in 1955
had drawn into Rural Banking. In 1980-81 the Government initiated Integrated Rural Development
Programme (IRDP) with objective of directing subsidized loan to poor self employed people through banking

4 LALITHA (1998) Rural Women Empowerment and Development Banking

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sector. The following table throws light on the loans disbursed to SHGs by different categories of banks. It
also segregates the loan disbursement to exclusive women SHGs.

Table 5: Bank Loans disbursed to SHGs during 2012-13

Bank Loans disbursed to SHGs during 2012-13
(Amount in Rs Lakhs)
Name of the Loans disbursed to SHGs by Out of Total- Exclusive
Sr. No. Agency banks during the year Out of Total- under SGSY Women SHG
No of SHG Loans disbursed No of SHG Loans disbursed No of SHG Loans disbursed
Commercial
1 Banks 735577 1338500.7 88594 107261.4 633234 11483938.3

Regional Rural
2 Banks 312010 562652.22 58890 73536 273835 519987.39
Cooperative
3 Banks 172234 157383.52 33688 39949.46 130333 117045.34

Total 1219821 2058536.44 181172 220747.16 1037402 1785431.03

Source: NABARD

From the above table it is evident that commercial banks gives the highest amount of loan to the SHGs.
Within SHGs, exclusive women SHG are ten times more in number than SHGs under SGSY. Similarly loans
disbursed to exclusive women SHGs is very high as compared to the loan given to SGSY.

The role and importance of SHGs have widened very speedily primarily due to the reason that there is a large
degree of comfort of replication and construction. SHG Bank Linkage has provided the capacity for SHGs to
increase their capital base to fund more members and bigger projects. In the current status, it is configured
that there are at least over 2 million SHGs in India. In many Indian states, SHGs are networking themselves
into federations to achieve institutional and financial sustainability. Cumulatively, 1.6 million SHGs have
been bank linked with cumulative loans of Rs. 69 billion. In 2004-05 alone, almost 800000 SHGs were bank
linked. The success of few nongovernmental Organisations (NGOs) like Mysore Resettlement and
Development Agency (MYRADA) in group lending, made the government in shifting the strategy of women
development and empowerment under Development of Women and Children in Rural Areas (DWCRA)
programme through group based approach. The first interest in informal group lending in India took shape
during 1986-87 on the initiative of NABARD. It took a research project on SHGs as a channel for delivery of
microfinance in the late 1980s. Amongst the MYRADA sponsored research project on „Savings and Credit
Management” on SHGs was partly funded by NABARD in 1986-87. In the very next year in association with
Asia Pacific Rural and Agricultural Credit Association (APRACA), NABARD undertook a survey of 43
NGOs on 11 states to study the functioning of microfinance Self Help Groups and their collaboration
possibilities with the formal banking system. Both these research projects threw up the encouraging

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possibilities and NABARD initiated a pilot project called SHG-bank linkage project. The spread of SHGs also
led to the formation of SHG Federations which are a more sophisticated form of organization that involve
several SHGs forming into Village Organisations( VO) / Cluster Federations and then ultimately into higher
level federations (called as Mandal Samakhya (MS) in AP or SHG Federation generally) . SHG Federations
are formal institutions while SHGs are Informal. Many of these federations are registered as societies, mutual
benefit trusts and mutually aided cooperative societies.

4.5 The Andhra Pradesh (AP) Microfinance Crisis

Compared to the other states in India, the growth and development of the microfinance sector followed a
unique course in AP. Although all the states in the country experienced initiation and the growth of SHG
Movement, the mainstay of Indian Microfinance, the state government of AP systematically nurtured and
deepened the institution of SHG through the use of public resources due to number of political motives. The
AP government constituted an autonomous body named Society for Elimination of Rural Poverty (SERP),
which is implementing the Indira Kranthi Patham (IKP) project in all the 22 rural districts of AP. The project
methodology involves mobilizing and organizing rural women in the SHGs consisting of ten to fifteen
members. Activities of the SHGs revolve around regular savings by their members, credit (from both external
and internal sources) and regular meetings (weekly, except in case of newly formed SHG). The SHGs have
been federated at village level are called Village Organisations (VO). The VOs have been further federated as
Mandal Samakhyas or Mandal Organisations (MOs) at mandal (sub districts) level. All SHGs in a village
contribute two members to their VO (one member in case of twenty SHGs in a village), while every VO in a
mandal sends two of its members to the concerned MO. All MOs have organized themselves in to Zila
Samakhyas or District Organisations (DOs) at the district levels (Government of Andhra Pradesh, 2009). The
SHGs, VOs, MOs and the 5 DOs are being increasingly involved in implementing and monitoring various
government development programmes through IKP.

The presence of such, existing organized groups of the poor resulted in the largest concentration of the MFIs
in AP among all the states in India. Thus, while AP households had much better access to microfinance than
all the other Indian states through the state sponsored microfinance programme, private MFIs flocked in to
AP to leverage on the SHG network already existing in the state. It was much easier for private MFIs to start
their business in AP than in any other state of India, which led to an oversupply of microfinance, more
specifically of microcredit, to AP households.

4.5.1 The origin of the crisis

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As stated above, microcredit in AP was supplied to an extent of saturation. This oversupply could sustain due
to a phenomenon called „aspiration paradox‟5. The aspiration paradox in western life is said to occur when a
family invests in holidays, a fancy car, housing or consumer goods - often using a credit card – without
realizing that the debts piling up are going to cause them to go bankrupt‟. The paradox is also observed in the
case of poor households as they very often fail to accurately assess and quantify their repayment capabilities
due to aspiration paradox. Thus, many poor households in AP took advantage of the easy availability of credit
and borrowed far beyond their repayment capabilities from various microfinance sources. The MFIs, for their
part, offered multiple loans to the same borrower household without following due diligence, as it served their
business interest. Worse still, some MFIs collaborated with consumer goods companies to supply consumer
goods such as televisions as part of their credit programmes. As the poor aspired to own such goods, they
were happy to receive them. Possession of such goods exacerbated their already worsening indebtness as such
investments did not generate any income. The poor borrowers therefore started defaulting in repayment and
the MFIs resorted to coercive methods of loan recovery. Many borrowers were forced to approach money
lender to borrow at exorbitant rates of interest to repay to MFIs. When the situation became impossible, some
of these borrowers committed suicide and the matter caught the attention of media. The issue became
political. A minister in the government of AP admitted on 3rd December 2010 that 75 suicide cases had come
to the notice of the government by that date (fullhyd.com). In some cases, even the employees of
microfinance institutions have been allegedly involved in forcing borrowers to commit suicide. After such the
government of India passed an ordinance .The Andhra Pradesh Microfinance Institutions (Regulation of
Money Lending) Ordinance, 2010 in order to harness the situation of oversupply of microcredit and coercive
practices to recover loanswhich was implemented with effect from 15 October 2010. The ordinance mandates
all the MFIs to register themselves with the government authority while specifying the area of their
operations, the rate of interest and their system of operation and recovery. The ordinance also specify stiff
penalties for „coercive action‟ by MFIs while recovering their loans. In addition, it prohibits them from
extending multiple loans to the same borrower and limits the total interest charged to the extent of the
principal amount.

5. Porter’s Five Forces Analyses Of Microfinance Industry

Michael Porter provided a framework that models an industry as being influenced by five forces. The strategic
business manager seeking to develop an edge over rival firms can use this model to better understand the
industry context in which the firm operates. Porter‟s Five Factor analysis is a framework for industry analysis

5 Aspiration Paradox is a concept that originated from the writings of Thorstein Veblen and was subsequently expanded and
elaborated by Pierre Bourdieu (Bourdieu, 2005).

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and business strategy development innovated by Michael E. Porter in 1979 of Harvard Business School. He
uses the concepts developed in industrial organization economics to derive Five Forces that determines the
competitive intensity and therefore attractiveness of a market. It consists of those forces close to a company
that affect its ability to serve its customers.

Porter‟s Five Forces analysis of the microfinance industry will help understand the new dynamics of the
industry completely. Following are the forces given by Michael Porter.

The threat of substitute products

The threat of existing Rivals

The threat of new entrants

The bargaining power of customers

The bargaining power of suppliers

This analysis helps to assess and manage the long term attractiveness of an industry. It is designed to explain
the relationship between the five dynamic forces that effect an industry‟s performance. It includes three forces
from „horizontal‟ competition, which can be referred as 3 Ts. These are:
 The threat of substitute products
 The threat of existing Rivals
 The threat of new entrants
And the two forces from „vertical‟ competition, which can be referred as to be 2 Bs. These are:
 The bargaining power of customers
 The bargaining power of suppliers

5.1 The Threat Of Substitute Products

The government, in the draft Microfinance Bill, have mentioned that the life insurance products have to be
provided under microfinance category. The insurance industry already has a lot of players. In addition some
private and nationalized banks were providing insurance products. They are popularly known as
bancassurance. These substitute products may pose a threat to the insurance products of the microfinance

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entities because of their expertise in the insurance domain and of the fact that microfinance institutions have
negligible experience in providing insurance services.

To overcome this threat, the microfinance industry has to develop expertise in the insurance field and redesign
its strategy for developing new products, based on the needs of the poor for e.g.,
 As most of the borrowers of the microfinance Institutions are women, the financial services can be
designed to cope up their widowhood
 As a women depends totally on the man of her family for her survival and sudden unexpected demise of
the man puts the women in the perils of social evils.
 The products have to be developed to suit the abandon old age couples and singles survival.
Moreover, the cooperative banks are already extending credit, as a substitute product, at a very low interest as
compared to many private and PSU Banks.

5.2 The Threat Of Existing Rivals

In general, intensity of competition depends upon the size of the firms in the game. As far as microfinance
industry is concerned the major operators are SHGs directly or through MFIs/NGOs. Apart from them there
are moneylenders, which, with negligible administrative cost and enormous wealth, may pose a threat to
microfinance entities. With more than thousand entities(850 registered and other non registered with(
NABARD), concentrated in selected states like Andhra Pradesh, Odisha, Karnataka, Chhattisgarh, there will a
pressure to reduce the margin to be in the business.

More and more organizations are taking up corporate social Responsibility (CSR) activities. Companies like
Oracle Corporations, IBM, PepsiCo, ITC and Infosys have a very detailed agenda on corporate social
responsibility, which doesn‟t directly involve in money lending but provide all support, both technically and
financially, for the development programmes in association with the local organizations. This makes them
virtual competitors in the microfinance arena.

In rural areas people have the mindset that co-operative bank and regional rural banks(RRS) are their only
source of money and for which they need collateral. As MFIs are a part of formal financial system, people
still perceive MFIs as banks which provide money without security leading to these co-operative banks
becoming the competitors of Microfinance Institutions. In this scenario, first of all MFIs and the government
have to educate the public, particularly the illiterate and ignorant, about this new social phenomenon. They
should conduct literacy campaign that can give basic verbal knowledge to adults.

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5.3 The Threat Of New Entrants

Currently in India the suppliers of micro finance may be classified into three categories as follows
 Formal sector which includes banks
 Semi formal group which comprises of MFIs and SHGs
 Informal providers which are not legal entities and includes money lenders, chit funds, pawn brokers,
employers, relatives and friends.
As per NABARD, there were more than thousand (850 registered and rest unregistered with NABARD)
entities providing microfinance services in India. With so much competition, the firms are already finding it
difficult to maintain their margins. After implementing Business Correspondent (BC) Model6, and providing
the facilities of No-Frills account, some banks have also forayed into microfinance. Banks with a large capital
base and less cost of funds may turn out to be a major threat to the microfinance entities.

After the RBI Guidelines have been issued and passing of Microfinance Bill in the Parliament, there may be a
rush to acquire the license of providing microfinance services as the minimum capital base required for
applying a license just Rs. 5 lac. This possibility cannot be ruled out in the current scenario when the
microfinance industry is becoming more formal with a central regulator and a set of concrete policies in place.
The flood of more and more companies in the industry will put more pressure on margins of the microfinance
institutions.

Microfinance entities should innovate themselves with specialized products for the target population, try to
reduce administrative costs by improving operational efficiency to meet the challenge posed by potential new-
entrants in the industry.

5.4 The Bargaining Power Of Customers

In any industry, the bargaining power of the customer depends upon
 Concentration of buyers,
 Number of suppliers providing similar services

In microfinance industry, most of the buyers are in groups or in clusters like SHGs. A group of buyers have
more bargaining power than an individual has. These groups can exercise their power through the
MFIs/Banks that they are affiliated to. The presence of lots of options for them also make them influential. As
an institution, they can influence the decisions of the supplier.

6 In BC Model an executive is assigned the responsibility of a particular area and he/she is responsible for visiting the area with a pre-
decided frequency to provide banking services. This model has help banks provide services in the remote areas at a low cost.

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Microfinance institutions are already facing tough competition within the industry as there are large number
of players, including local money lenders providing microfinance services. The presence of large number of
options for the customers gives them the bargaining power.

Another factor is availability of the substitute products and various sources for the same. In remote villages,
people prefer taking loans from the local money lenders as they are accessible more easily. Hence, availing a
loan from MFIs automatically, become a second priority for the people, giving them an upper hand on the
pricing of the credit.

A matter of concern for the people, and the government is that not many people are aware of the range of
options available for them for availing loans. Moreover, most of the people in the rural areas are financially
illiterate, which give the MFIs the opportunity to advantage of the situation.

5.5 The Bargaining Power Of Supplier

Barring a few states, most of the rural areas are still untouched and the concentration of MFIs in some areas is
very high. Hence, the MFIs, ideally, should have negligible power in dictating terms in the business. But, due
to widely prevailing financial illiteracy in the rural areas of India, most of the MFIs charge the poor very high
interest rates, ranging from 20-30%.

The government has acknowledged the fact that the microfinance institutions are taking advantage of the
financial illiteracy of the rural population. Hence, the issue of charging high interest rates has been addressed
in the recently introduced RBI guidelines. The cap of 12% on the margin of the MFIs will, eventually, lead to
lower rate of interest on the loans disbursed to the poor.

6. Conclusion
Microfinance, since its inception, has received over-whelming response by the poor as they see it as a ray of
hope for availing the financial services like microcredit. But, unfortunately, Microfinance has not received
much attention from the government of various states and the government of India, despite the fact that
microfinance is expected to play a vital role in realization of financial inclusion.

From the Andhra Pradesh Microfinance crisis, we have learnt that all the states should take policy initiatives
so as to avert the crisis like this in the future. The microfinance bill which is to be tabled in the parliament
soon, addresses this issue, providing the industry a much needed priority sector status. Issue of many MFIs
charging high interest rate has been successfully addressed by the RBI Guidelines and the microfinance bill.

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Coercive recovery methods and non-transparency in informing the borrower about the interest rates by
various MFIs in Andhra Pradesh got attention of all the sections of society. This has dented the image of
MFIs and the microfinance sector. This may play a spoilsport for the industry. Industry bodies like Sa-Dhan
and MFIN should work to cleanse the image.

Microfinance can achieve its objective of financial coverage, financial independence and poverty eradication
of the borrowers only if microfinance institutions and if the government, NGOs and the other organizations,
and microfinance institutions work in tandem helping one another to address the prevailing issues in the
industry like policy inaction by governments, non-uniformity of the rural outreach by the MFIs, more
specifically, selecting the target population wisely and help them get the required skills to take up an
economic activity that may help them lift them out of poverty. The role of government and of NGOs is of
utmost importance here as they can help the poor acquire the skill-sets.

It is important to note that providing financial services means providing services like micro-pension, micro-
insurance, thrift services too. Thrift services may prove beneficial for the entities that can accept deposits. The
money collected from thrift services should reduce the cost of funds for the MFIs, and as they have to meet
the regulation of a cap of 12% in margin enjoyed by them, the borrowers will be the beneficiary ultimately.
MFIs need to innovate themselves to customize the insurance products as per the need of the poor.

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13. Pradhan N C (2013), Persistence of Informal Credit in Rural India: Evidence from „All-India Debt and Investment Survey‟ and
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