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NGOs struggle as they venture into microfinance
New Delhi: Eight years after microfinance began to boom in India, there is more money available in the field than ever before. But, as Indian non-profit organizations (NGOs) follow the money and set up their own in-house microfinance units, many find themselves flailing.

Some of this can be attributed to a lack of expertise, but there also appears to be something less tangible at play. Some call it the “NGO mindset”. “As many as 70% or 80% of NGOs struggle when they start their microfinance activities,” notes Abhijit Ray, vice-president at Unitus India, a consultancy to microfinance institutions. “A handful can smoothly set up within six months, but many take up to three years or more. I’ve seen NGOs with 10-year-old microfinance units that still have very limited growth.”

The stumbling block, says Ray, is the service-oriented mindset of NGOs. Having been founded on such a commitment and after cultivating it for years, an NGO venturing into microfinance must suddenly prepare to be ruthless about profit. But, that transition is almost never smooth.

“There is no such thing as an emotional banker,” says R.K. Mukherjee, vice-president of microfinance at Access Development Services. “When you deal with money, it has its own discipline, which NGOs must heed.”

One of Unitus’ 14 Indian partners, Trichy-based ASA-GV, is a classic case in point. ASA was a trust that began in 1986, focusing on natural resource management and sustainable community living. In 1996, ASA moved into microfinance, starting ASA-Grama Vidiyal as an in-house unit.

The impetus was a perceived grass-roots need for microfinance-led activities, says Arjun Muralidharan, chief executive of Grama Vidiyal. But, he also says of the NGO sector at large: “The lack of donor money is the only reason for the shift to microfinance.”

The Indian NGO world has come to accept the fact that grant money has dried up. “Around 10 years ago, donors realized that grants were not working, and also that the Indian economy was growing rapidly,” says Murali Srinivas, chief operating officer of Mimo Finance, a Dehradun-based microfinance firm. “Microfinance had been shown to work at the lowest level. No other bottom-of-the-pyramid business has worked on this scale. So, the emphasis shifted from grants to microfinance.”

In 2007, venture capitalists invested $50 million (Rs200 crore at current rates) in microfinance activities, compared with virtually nothing the year before, according to Venture Intelligence, which tracks private equity and venture capital in India.
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