1. Nottingham University Business School
MBA Programmes
BUSINESS ECONOMICS
SCP Analysis of Microfinance Industry in India
Prithviraj Paul Choudhury
Student ID: 4122992
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Word Count - 2075
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2. Table of Contents
1. Introduction
2. S-C-P Analysis of Indian Microfinance
a. Market Structure
i. Market Concentration
ii. Barriers to Entry
b. Market Conduct
c. Market Performance
i. Profitability
ii. Output
3. Discussion and Recommendation on Government Policy
4. Validity of S-C-P Paradigm and Conclusion
5. References
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3. 1. Introduction
The question most people might ask about Microfinance market is whether the industry is
sustainable and profitable? Well the answer seems it is characterized as a “monopoly with mono-
products”. It can be contrasted with Ford’s perspective of the automotive market, which is still
product driven rather than market driven. MFI issues highly standardized loans with little variation
which are easy to administer and fraud are easy to control (Brand 1998).
The aim of this study is to analyze the Microfinance industry from the perspective of a policy maker.
The essay starts with defining the Microfinance market which will then help in defining the industry.
Based on the market boundaries, S-C-P framework will be used to do the industry analysis.
Traditionally, the Structure-Conduct-Performance (S-C-P) paradigm hypothesized that in an industry
there are observable structural market characteristics (e.g., the number of firms, concentration,
entry barrier, degree of product differentiation) that determine firm conduct (e.g. collusion policy,
pricing strategy, R&D, advertising) that in turn determine performance (e.g., profitability, growth in
output).
For the study purpose, Market concentration and Entry barrier will be used to define the Market
Structure. This will help to understand the behavior of the Microfinance industry and then to
evaluate the performance of the industry in terms of profitability and growth in output. Based on
the industry analysis, some recommendations will be formulated regarding govt. policies. And
finally, in the conclusion the validity of the paradigm will be either supported or critiqued based on
the findings.
2. S-C-P Analysis of Indian Microfinance Market
STRUCTURE CONDUCT PERFORMANCE
Figure 1: SCP Paradigm Causal Relationship
a. Market Structure
The first task is to define the market under investigation. Since the purpose of the study is to
establish the attractiveness of the industry, thus all the MFIs of India are included in the definition.
Microfinance uses SHG model for various economic activities in areas such as Agriculture,
Horticulture, Sericulture, Animal Husbandry, Cottage and Village Industries and other small
businesses/micro enterprises in urban areas. Microfinance institutions are not a specific legal
institutional form. Among the Indian institutions offering microfinance services, there are Non-
Government Organizations (NGOs), Private Foundations/Trusts, Cooperatives, Commercial Banks,
Regional Rural Banks (RRBs), Local Area Banks (LABS) as well as specialized Non-Banking Financial
Institutions (NBFCs) and Sec 25 Companies (Kumar, Sanu, Newport).
The definition of market is incomplete without the mention of substitutes (Moschandreas, Business
Economics). The only known substitutes to Microfinance could be informal money lenders and
banks. Money lenders form a small portion, but private bankers and corporates like ICICI, HDFC,
Reliance, etc. are coming in a big way to compete with the micro finance industry as the rural market
is having huge potential for micro finance. There is no doubt that competitions will be more in the
micro finance industry and hence small MFIs have to make customer specific strategies. The Micro
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4. Finance Institutions will henceforth have to bear in mind that they will not merely compete with
themselves but also with other significant actors in the whole industry.
In a span of 5 years the market trend has drastically changed. The near monopoly status enjoyed by
MFIs has changed. MFIs are now disciplined by a competitive market and their internal control.
i. Market Concentration
Worldwide, MFIs are evaluated based on their Outstanding Loan Portfolio and Number of Active
Borrowers. In India, there are all together 148 MFIs with an overall gross loan portfolio of 4.6 billion
USD. Based on the market definition, a list of fifteen firms is prepared which include Gross Loan
Portfolio of the firms, Number of Active Borrowers and Market concentration of loan portfolio.
Table 1: Comparison of Top 15 MFI statistics
Gross Loan No of Active Market
MFI Portfolio borrowers Concentration
SKS 960793988 5795028 21
SPANDANA 787304262 3662846 38
SHARE 490923201 2357456 49
BANDHAN 332462204 2301433 56
AML 315439786 1340288 63
BASIX 223229799 1114468 68
SKDRDP 136728666 1225570 71
EQUITAS 134597374 888600 74
GRAMA VIDIYAL MICROFINANCE 134568751 772050 76
UJJIVAN 82447140 566929 78
SEIL 77876659 199731 80
GFSPL 73420428 352648 82
CASHPOR MC 59461459 417039 83
BISWA 58971572 305679 84
FFSL 54332892 257991 85
OTHERS 677441819 5042244 100
(Source: http://www.mixmarket.org/mfi/country/India)
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5. Figure 2: Plot for Market Concentration
The concentration ratios are as follows:
CR2 = 38
CR5 = 63
CR10 = 71
CR15 = 85
It is observed that the Microfinance industry in India is monopolistic with many firms offering slightly
differentiated products. It may also be argued that looking at the potential size of microfinance
industry and the area wise concentration of these MFIs, some of the MFI’s do enjoy monopoly status
(Brand 1998).
ii. Barrier to Entry
A barrier is defined as anything that allows the existing firms to raise their price above the
competitive level without attracting new firms in the industry (book reference). In Microfinance
industry, some of the forms of barrier are as follows (Brand 1998):
• Staff: New products need specialized expertise and educated well-trained credit officer.
• Delivery channel: Sufficient capacity is required within the delivery channel to market and
distribute its products.
• Systems: An efficient information management system to track loans, track demand and
forecast profitability. An MFI must determine whether its systems can handle the
disbursements and collections necessary for the fluctuating terms of such loan products.
• Risk management: Diversification reduces portfolio risk but new products may increase
liquidity issues. A MFI can introduce highly liquid savings product or a long term loan
product but at the same time should also be able to meet short term cash needs. It needs to
have robust management information and accounting systems, in addition to skilled,
responsible staff for periodic portfolio monitoring.
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6. • Training procedure: Maintaining a well trained staff is essential as the complex loan
products or other financial products have to be made understood to the local customers.
But in Microfinance industry, these barriers to entry may not be strong as everyone has access to
same technology. There is less capital investment and also there is no sunk cost. Even though MFIs
are trying to establish healthy long term client relationship, but due to less product differentiation,
consumers respond to price change instantaneously and so are less brand loyal.
Low entry barrier and high profitability attracts new entrants, and in microfinance industry, the
potential entrants are from every nook and corner. Apart from Banks, local NGOs in association with
International Funding Organizations are inclined towards microfinance activities for sustainability. In
the case of NGOs there are neither clear-cut regulations nor entry/exit barriers for doing the
microfinance activities in India. Only exception is in case of NBFC registration under Sec 45 of
companies Act, the act itself has an entry barrier, as the capital requirement is a minimum of 200
million. But Corporates and industrialists will enter micro finance industry to tap rural markets under
this registration (Kumar, Sanu and Newport).
Under such conditions, the microfinance market is perfectly contestable. The incumbents can’t earn
super normal profits. Due to low brand loyalty and a price elastic demand faced by the firms, new
entrants can undercut existing prices to take away customer base.
b. Market Conduct
As MFIs become profitable and transform into regulated commercial entities, they have become
accountable not only to their shareholders (PE funds, investors) but to sophisticated boards of
directors, parent NGOs, and regulatory authorities that also monitor their activity. (Brand 1998)
c. Market Performance
i. Profitability
An analysis of the profits reported by a few major non-banking finance companies engaged in micro
finance has revealed that the average profits these firms accumulated through their earnings from
interest on loans had swelled from 907.12 million USD in 2007-08 to 5506.56 million USD in 2009-10.
In other words, their profits had multiplied by 6 times over a period of two years.
Table 2: Comparison of Profits
MFI 2007-08 2009-10
SKS 1701 9589.2
SPANDANA 1274.5 7240.9
SHARE 1130.8 4752.7
BANDHAN 65.6 2221.1
UJJIVAN 363.7 3728.9
(Source: http://indiamicrofinance.com/ministry-finance-holds-detailed-discussion-profits-microfinance-nbfcs.html)
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7. Figure 3: Plot for Profit
ii. Output
The growth is not only in terms of profit but also in adding new borrowers to the existing ones. At an
average these MFIs have increased the number of active borrowers by almost 3 times over the
period of two years.
Table 3: Comparison of No. of Active borrowers
MFI 2007-08 2009-10
SKS 1629474 5795028
SPANDANA 1188861 3662846
SHARE 989641 2357456
BANDHAN 896714 2301433
UJJIVAN 58646 566929
(Source: http://www.mixmarket.org/mfi/country/India)
Figure 4: Plot for Active no. of Borrowers
The existence of high profit and the increase in output suggest that the industry is currently highly
attractive and so is likely to face higher competition in future.
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8. 3. Discussion and Recommendation on Govt. Policy
In Indian Scenario, microfinance is seen to bring transformation in the economic conditions and
lively hood restoration of the rural communities. Whereas the fact is obvious that there is gap in
best practices in credit delivery, lack of product diversification, customer overlapping and
duplications, consumption and individual loan demand with lack of mitigation measures, less thrust
on enterprise loans, collection of savings/loans and malpractices by Self Help Groups (SHGs) and
Micro Finance Institutions (MFIs) and highest interest rate prevailing in micro finance sector. All
these are clear syndromes, which tell us that the situation is moving without any direction.
One solution to this problem is lender restraint and due diligence over collection practices and MFI
pricing transparency, ideally monitored by appropriate rating agencies (Sanjay Sinha 2010).
The super normal profits will attract new players and due to favorable govt. policies and barriers to
entry being low will intensify the competition. So, it can be expected that the market will self-
regulate the industry. Though there are traces of regulation such as MFIs registered as non-bank
finance companies (NBFCs) have, until now, only been allowed to provide credit services to their
clients. Though many have also provided insurance services (as aggregators for insurance
companies), deposit services have been specifically prohibited by the regulator, the RBI.
However, recording high growth has been the MFIs’ way of impressing equity investors with their
profit earning potential and obtaining good valuations for their shares which will help them to
expand. In an environment of frenzied growth, MFI lending quality has declined and internal
controls have failed to keep pace; if some loan officers have engaged in inappropriate behavior with
clients, it comes as no surprise.
With more funds in hand, there will be intense competition between the players which might result
in pushing of loans to existing customer base leading to customer duplication and multiple loans.
Thus, there is a possibility of Microfinance bubble (Rozas and Sinha 2010) in India which may hinder
the growth of the industry.
Government has to play a role to curb this danger by imposing regulations on multiple borrowings,
interest rate caps and should encourage MFIs to bring down their interest rates to bank rates. These
will force MFIs to adopt efficient ways to sustain growth and can also promote product
differentiation.
4. Validity of S-C-P Paradigm and Conclusion
In S-C-P Paradigm, the direction of causation runs from structure to conduct and from conduct to
performance. But the study has revealed that in the Microfinance industry, due to the high
performance of the firms, new players are attracted towards the industry. This has raised the
industry competiveness and so firms are forced to self-regulate, focus on producing customer centric
loan products, reduce interest rates to remain competitive and thus defining the conduct of the
market. Also based on the performance results, government may be tempted to impose regulations
which will again align the behavior of the firms. A change in conduct will then affect the structure of
the industry as barrier of entry is becoming insignificant and so firms will forced into product
differentiation.
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9. The primary objective of MFI is to provide loans for income generation through various economic
practices. But in the light of high competition, the services offered have to be differentiated
particularly if the market is facing intensive price competition. The offer can include innovative
features to distinguish it from its competitor to increase brand loyalty and hence customer base. The
secondary services can include low cost housing technology, housing insurance, market support
services to non-farming customers. For farming customers, technological inputs like soil testing,
pesticides selection, high yield seeds, fertilizers, irrigation techniques and information on monsoon
can be an attractive proposition (Kumar, Sanu and Newport).
Thus, in this industry, high competitiveness seems to have been brought about by high profitability
and increased output implying a reversal in the causation of S-C-P paradigm.
STRUCTURE CONDUCT PERFORMANCE
Figure 5: Revised S-C-P Paradigm
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10. 5. References
Matraves, Randi 2005, “Product Differentiation, Industry Concentration and Market Share
Turbulence”, Ceris-Cnr
Brand 1998 “New Product Development for Microfinance: Evaluation and Preparation”,
Microenterprise Best Practices
Kumar, Sanu and Newport, “Institutional Challenges in Microfinance Sector”, Indian Association for
Savings and Credit.
Moschandres 1994, “Industrial And Market Structure”, Business Economics 1994, Thomsan Business
Press.
Sanjay Sinha 2010, “Microfinance Regulation – A more subtle approach”, Available at:
http://www.microfinancefocus.com/news/2010/11/03/microfinance-regulation-a-more-subtle-
approach/ [Accessed on 12th Dec, 2010]
Daniel Rozas and Sanjay Sinha 2010, “Avoiding Microfinace Bubble in India- Is Self regulation the
answer”, Available at: http://www.microfinancefocus.com/news/2010/01/10/avoiding-a-
microfinance-bubble-in-india-is-self-regulation-the-answer/ [Accessed on 12th Dec, 2010]
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11. 5. References
Matraves, Randi 2005, “Product Differentiation, Industry Concentration and Market Share
Turbulence”, Ceris-Cnr
Brand 1998 “New Product Development for Microfinance: Evaluation and Preparation”,
Microenterprise Best Practices
Kumar, Sanu and Newport, “Institutional Challenges in Microfinance Sector”, Indian Association for
Savings and Credit.
Moschandres 1994, “Industrial And Market Structure”, Business Economics 1994, Thomsan Business
Press.
Sanjay Sinha 2010, “Microfinance Regulation – A more subtle approach”, Available at:
http://www.microfinancefocus.com/news/2010/11/03/microfinance-regulation-a-more-subtle-
approach/ [Accessed on 12th Dec, 2010]
Daniel Rozas and Sanjay Sinha 2010, “Avoiding Microfinace Bubble in India- Is Self regulation the
answer”, Available at: http://www.microfinancefocus.com/news/2010/01/10/avoiding-a-
microfinance-bubble-in-india-is-self-regulation-the-answer/ [Accessed on 12th Dec, 2010]
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12. 5. References
Matraves, Randi 2005, “Product Differentiation, Industry Concentration and Market Share
Turbulence”, Ceris-Cnr
Brand 1998 “New Product Development for Microfinance: Evaluation and Preparation”,
Microenterprise Best Practices
Kumar, Sanu and Newport, “Institutional Challenges in Microfinance Sector”, Indian Association for
Savings and Credit.
Moschandres 1994, “Industrial And Market Structure”, Business Economics 1994, Thomsan Business
Press.
Sanjay Sinha 2010, “Microfinance Regulation – A more subtle approach”, Available at:
http://www.microfinancefocus.com/news/2010/11/03/microfinance-regulation-a-more-subtle-
approach/ [Accessed on 12th Dec, 2010]
Daniel Rozas and Sanjay Sinha 2010, “Avoiding Microfinace Bubble in India- Is Self regulation the
answer”, Available at: http://www.microfinancefocus.com/news/2010/01/10/avoiding-a-
microfinance-bubble-in-india-is-self-regulation-the-answer/ [Accessed on 12th Dec, 2010]
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