Earlier this week, Lok Capital and Aavishkaar Goodwell announced their investment of INR 20 crore into Mumbai based Suryoday Microfinance. Suryoday currently has a portfolio of around Rs. 115 crore and serves a client base of around 145,000 clients. With the recent funding, they plan to expand their presence in Maharashtra, Tamil Nadu, Gujarat and Orissa, in order to move towards their goal of reaching one million households by 2014.“Despite the fact that microfinance initiatives are over two decades old in the country, financial inclusion is still a distant dream for many poor people,” said Baskar Babu, CEO, Suryoday Microfinance. “And, the sharp rise in the number of banks or financial institutions has not helped solve this problem adequately. The unbanked, underserved population is in dire need for inclusive growth. This is the reason we, at Suryoday, work towards enhancing the income and asset ownership levels of these people. The measurement of our success is by the percentage of customers moving into formal channels like banks, to utilise both savings and credit facilities. We are happy with the new investment, as this endorses the faith that our investors repose in our model and performance.”
The funding news denotes the recovery of Indian microfinance since the crisis in 2010. After the crisis, worldwide criticism of microfinance seemed to dominate the discourse surrounding the practice hailed at one point as being the beginning of the end of poverty. Rapid expansion of the industry led to irresponsible loan practices, resulting in over indebtedness. When the state government of Andrah Pradesh responded to this by writing off many of the existing loans, the industry came to a halt, causing many investors to back out. SKS Microfinance, the success story that had gone public just before the crisis in July 2010, saw its share price drop over 50% in just a few months.
In the past year or so, it seems microfinance has begun to rise once more. According to Grameen Capital India the past year has seen $144 million of equity injected into microfinance institutions, more than twice that of the preceding year.  Suryoday’s recent funding might imply this will continue to rise in 2013. If it does, the increased capitalization of the industry offers promise to the millions of unbanked poor throughout the country.
The revival of the microfinance industry in India will be an interesting development to follow. In a country with the largest unbanked population in the world, efforts to promote financial inclusion would not only help pull millions of people out of poverty but also fuel the Indian economy as a whole. However, as investment returns to microfinance, we have to ask ourselves, what will make this time different from the last time?
For one, the Central Bank of India has stepped in to act as the official regulator of the industry in order to prevent another Andrah Pradesh scenario. This will aid in preventing another sudden exodus of investor capital, but it will not account for all of the shortcomings of the industry prior to its 2010 collapse. In order for microfinance to function properly as a means of poverty alleviation, it requires a customer centric model with heavy ground presence and proper attention paid to clients. A profit maximizing model simply cannot work. Unfortunately, the model that affords microfinance institutions the highest impact margins but lowest profit margins is the least attractive to mainstream investors.
The new wave of investment into the microfinance sector holds promise for the millions of India’s unbanked. However, in order to avoid another disappointment, more needs to be done to refine the industry than the central government taking over as regulators. The world seems to be giving microfinance a second chance to prove its strength as a tool for development. It is up to the institutions to seize the opportunity to restore the microfinance legacy, and adopt a customer-centric model even if it means assuming a greater financial cost.