The major issues arising from the development in microfinance sector during the year are: the potential for mission drifts in pursuit of vigorous growth, high risks are inherent in fast-paced growth of organizations that do not have adequate internal checks and controls, the aspirations of majority of NGOs to sectors to get transformed into MFIs and the impact it would have on savings by people in their groups, the heightened interest in urban microfinance and the resultant competition increasing the risks of MFIs and their funders.

The other issues are the relative ease with which the funds flow into the sector at the top and the difficulties faced by the players in the middle. Also there is a certain level of discomfort among banks in expanding their portfolio of bulk loans to the smaller MFIs on account of their perceptions of governance, transparency, quality of information and risk to reputation. Banana Skins Survey Report highlighted managing technology, management quality, corporate governance, staffing and competition as key risks in Asian microfinance.

The biggest story in the financial sector which would impact microfinance as well is that of the farm loan waiver. The amount, coverage and the manner of waiver would tend to put the microfinance operations under pressure. As a result of this a significant number of waiver client families are likely to be common clients of microfinance sector as well. The clarification by government that SGHs and members who had borrowed for farming purposes would also be eligible for waiver which has opened sector to higher risks of political nature.

Despite of all this, key challenges remain. A World Bank study assessing access to financial institutions found that amongst the rural households in Andhra Pradesh and Uttar Pradesh, more than 50% lack access to deposit accounts and more than 70% lack access to credit. Considering that the majority of 36 crores poor people (urban and rural) lack access to formal financial services, the number of customers to be reached, and the variety and quantum of services to be provided is very large. Reaching this market requires serious capital, technology and human resources. However, 80% of financial sector is still controlled by public sector institutions. Competition, consolidation and convergence, though, all are being discussed to improve efficiency and outreach, but the significant opposition remains.

In addition to this there is lot of policy focus on what activities are and are not allowed and there is not enough operational freedom as yet for banks and financial institutions to design and deliver programs and be responsible for their actions. Prescriptions and detailed procedures often limit organizational innovation and market segmentation. However, if the right indicators are monitored and operational freedom and incentives are clear then both the banks and MFIs have the capacity to rapidly address the remaining challenges.