Recent Trends in Urban Micro-finance in India

Traditionally MFIs in India are serving the ‘unbanked’ rural India. Presently, the microfinance industry in India is serving more than 37 million customers. Though MFIs have started serving the rural India, in the recent past, it is observed that there is a shift from rural India to urban India. According to the latest data, compiled by the Sa-Dhan organisation, 67% of the MFI customers live in urban areas. The share of rural customers has drastically reduced from 67% in 2012 to 33% in 2015.

Reasons for the growth of micro-finance in urban India:

There is an exceptional growth of few urban-focused MFIs like Janalakshmi Financial Services Pvt. Ltd and Ujjivan Financial Services Pvt. Ltd etc. Their growth for the last year is higher than the average industry growth and most of their customer base is in urban areas. With Bandhan conversion as bank, it can replicate its rural microfinance model in urban areas.

Many MFIs have changed their business models. Now they are more focused on minimization of operation expenses and maximization of operational efficiency. The profitability of MFIs fully depends on their operation efficiency. Presently, most of the MFIs operational cost goes out for opening offices in rural areas. In rural areas, the cost to serve the customers is more due to more travel expenses.  MFIs find these rural areas as less profitable. Urban areas are densely populated and they offer high customer base with less expenses. Serving urban-slums is very cost-effective. Few urban-based MFIs started tie-ups with other financial institutions to offer prepaid cards to their customers. This will decrease the transaction cost of operations. Many urban-focused MFIs have incorporated several technological upgradations to follow the retail banking model.

Many banks in India hesitate to serve to small borrowers and they were refused for loan facility. Currently there is a huge demand from the unorganised sector and migrants for microfinance loans in urban areas. Now MFIs have started capturing these small borrowers like drivers, vegetable vendors, housemaids etc. in urban areas.

The demand for microfinance loans in urban areas has gone up in the last one year as there is an increased financial literacy in urban areas due to CSR activities by corporate houses and banks.