I sometimes wonder whether a bubble is developing in the Indian Micro-finance space.

Micro Finance Institutions are trying to scale up too fast in a bid to enhance value for the shareholders and investors. Banks find it convenient to lend to MFIs because of the lower transaction costs and the opppertunity to classify such advances as Agriculture lending,lending to weaker scetions and sometimes to Scheduled castes and Tribes. For all these categories, there are multiple targets stipulated by the regulators.

Multiple lenders make it difficult to have any effective monitoring and control.In short there is excess liquidity. It is left to the MFIs to have self control. Loans at the field are renewed with enhancement which sometimes masks real defaults . An ideal environment for an accident to happen or a bubble to burst