Uneven Growth of MFIs Leading to Bubble

The market penetration of MFIs has continued its rapid growth and Indian MFIs have added six million customers in 2009. This is of course good news. The less good news is that the state that was already the most heavily penetrated in 2008 – Andhra Pradesh – was also the largest contributor to that growth. Surprisingly, the second largest contributor is Karnataka, itself a heavily penetrated state, and of course home of the current repayment crisis in Kolar and other southern districts. Indeed, of the top five growth contributors, the three southern states of Andhra Pradesh, Karnataka and Tamil Nadu contributed 54% of new MFI clients in India during 2009. Since these states in 2008 already accounted for nearly half of all microfinance clients in India, the clear conclusion is that growth continues to be driven by states with an already large client base.

In a country where each state has a population equivalent to medium sized countries, it is perhaps inevitable that this analysis is complicated by regional considerations within states. Thus, while southern Karnataka undergoes a delinquency crisis caused substantially by such a bubble, northern districts of the state continue to be under-served. Similarly, while AP has a very high concentration ratio with bubbles developing in the Guntur-Warangal-Vijaywada region, Medak district (not far from Hyderabad) continues to be under-served. Such large variations within states with high overall penetration numbers suggest that multiple lending is a far greater problem in many local areas than the statewide numbers would suggest. But bubbles aren’t isolated to just these few states. In West Bengal, for example, the region around Kolkata is served by many MFIs with substantial multiple borrowing. Perhaps the most piquant situation is that in Uttar Pradesh (UP), where the Lucknow-Kanpur region has seen substantial MFI activity leading to a local delinquency crisis, despite the fact that the state as a whole is one of the least penetrated of all the larger states in India.

Given this focus on penetration levels and local delinquency issues India as a whole still has vast regions that are largely unserved by microfinance, but this is beginning to change. While in absolute numbers the heavily penetrated states have contributed the bulk of the growth in 2009, the less-penetrated high-population states are generally growing faster. Indeed, the inversely proportional relationship between existing penetration and growth is undeniable, suggesting that the heavily penetrated state need not be MFIs’ growth engines for much longer, potentially reducing one of the major obstacles to the MFIs’ efforts to curb over lending.