Studies on Micro-Finance and Micro-Finance Institutions indicate that demand for providing small ticket loans as compared to supply is huge. Currently, only 3.6 per cent of the market is being tapped of the estimated USD 7.2 billion.

Much of the action in India it seems is in its southern heartlands and more specifically in Andhra Pradesh, where the market penetration is around 12 per cent.

The resounding success story of the Bangladeshi Grameen Bank which pioneered the concept of Micro-financing proved that even by lending to the poorer sections, a high degree of success can be achieved if the implementation is right.

However, there is a clear difference in the way Grameen Bank operates and the for-profit MFI’s which have first generation entrepreneurs as their founders, operate.

The basic difference is that while Grameen Bank’s operations commenced and ended with financing people, the new age MFI’s  seek to ensure and enhance the value for shareholders by effectively managing operations.

This has given P/E investors an opening to park their funds and target high rates of return on their investments. The new age MFI’s business model charges high rates of interest with high repayment rates.

MFI’s that are registered as NBFC’s have seen the P/E investors being particularly interested in investing in them due to the huge potential for growth.  It is no secret that most P/E investors look at MFI’s as cash cows. In 2010 P/E investments in MFIs in a  total of 11 deals aggregated USD 84 million.

Thus, given the potential of growth and the untapped rural market of India,  MFIs are set to gain in the long term leading to achieving twin benefits of poverty eradication as well as a profitable business model.

Yet, despite the groundswell of positives over negatives and mainly the high interest costs, how much these institutions can diversify their revenue model will need to be monitored.

This is because increasing investor participation will inevitably lead to enhanced competition which in turn will lead to greater concentration on profits alone, at the cost of is core mission and objectives.

Over time, this could not only overturn the pivot on which this business model stands but also prove counter-productive. For now though, the industry offers exciting opportunities and possibilities for young entrepreneurs. With P/E funds joining the party, their route to the primary market too seems well chalked out.

And, it is really here that the real churn could begin.