Latest figures available from the Bharat Microfinance Report, compiled by Sa-Dhan, the self-regulatory nodal agency for MFIs in India, reveal that MFIs are growing at a substantial pace and building up a solid credit portfolio. Here, it is important to note that the success of MFIs in realizing loan repayments is often better than that of banks. This is a huge feat when one considers the risk factors involved with MFI lending.

Amounts MFIs offer as loans might be miniscule compared to other loan ticket sizes, but these are disbursed with almost no documentation. MFIs, like VFS, lend out money at a much higher risk, since almost all loans are issued to women from rural areas, with no financial collateral or the safety net of a job. Interestingly, this has not been a road block for MFIs to recover disbursed loans. Traditionally the recovery rate has stayed between 97- 100%.

Even though MFIs lend money at a higher interest rates, the associated risks need to be considered and the success of micro-credit needs to be judged based on these parameters. In fact, MFI interest rates are higher because their operating costs are different from those of banks and the last mile penetration is in areas which are highly inaccessible.

Alex Artiach Sounssi, research scholar with University of Exeter in the UK, who studied the microfinance phenomenon in India and elsewhere, observed that MFIs will never be able to match interest rates of banks because lowering rates will make it almost impossible for micro-lenders to recover costs and might even force them to withdraw from the market. This view has been supported by many experts, who believe that this will cut off the present clientele of MFIs from any access to financial services and might even force them to enter a vicious cycle controlled by money-lenders, which has traditionally proven to be a serious socio-economic issue in India.

Sounssi noted that it is imperative for MFIs to cap defaults in repayment at less than 2 percent globally, which, however, in the case of developing countries like India, may be within 10 percent, keeping inflation in mind.

While it might seem strange that MFIs charge higher interest rates, that too, from people without much financial stability, empirical data reveals that MFI clients have better satisfaction and repayment record. In fact, across the globe, low-income clients are not only honouring their debts but are also returning for more loans.