Making microfinance commercially viable

The Reserve Bank of India (RBI) through various policy measures has sought to promote small-ticket lending (primarily through priority sector lending stipulations). Some of these measures overlap with what is now known as microfinance.

The RBI’s objective was to promote and strive to achieve financial inclusion. With the recent growth in microfinance in India, and an increase in microfinance institutions (MFIs), it is now time to rethink the traditional model of MFIs borrowing from banks for the purpose of on-lending, and evaluate innovative financing mechanisms such as the securitization of microfinance portfolios and guarantee as credit enhancement.

Besides driving down transaction costs, such financial innovations allow certain investors to fulfil their philanthropic or social welfare objectives while at the same time enabling such investors to earn returns on their investments.

Sonali Sharma is a partner and Suprio Bose is an associate at Juris Corp. The firm is a full-service law firm based in Mumbai and specializes in financial transactions including capital markets and securities, banking, corporate restructuring and derivatives.