Microfinance Institution

1. The Problem

One of the main problems in the microfinance industry is the time required to reach the break-even point, due to the scale of operations. The average size of disbursed loans is indeed very low, and sometimes economically inefficient. However, providing poor people with small loans is the very essence of microfinance, and is hence an approach that cannot be simply dismissed. As a consequence, those institutions that have been able to survive and reach a state of sustainability have done so increasing their scope, mainly in geographical terms, to reach as many customers as possible.

In the past two years Mimo consolidated its presence in the Dehradun district, where the head office is located, and is now witnessing market saturation, mainly due to the rise of strong competitors like Uttarakhand Micro Finance, that is a government-sponsored institution and has hence a privileged access to funding, and SKS, the major Indian player in the global market. Having set a very challenging target, in terms of growth, Mimo decided to open branches in different districts of the State, and to start operations in other Indian regions (Haryana, Uttar Pradesh and Hymachal Pradesh).

To make the growth sustainable, the Company also developed a plan for reducing the debt to equity ratio, exploiting the visibility acquired joining several MFIs networks like Sa-Dhan and benefiting from the interest business angels are showing in the industry.

The forecasted evolution of the debt to equity ratio is also showed in the graph below.

Graph 3 – Debt/Equity evolution

Given the paramount importance of a successful expansion, the company hired experienced bankers willing to use their skills in this new field as branch managers. Moreover, collaborating with the managers, the Board set quarterly targets for each branch, according to the dimension of the branch itself, and considering the development path followed by the head office as a reliable...