For those unaware, we Indians love our acronyms, we like to keep these acronyms no longer than three letters and MFI is what we call Micro-Finance Institutions. We also like things spicy - food, politics, sport, business rivalries and so on (I actually think most Indians don't like things as spicy as the media for example would have us believe but that is another matter altogether) and the MFIs are the spicy industry of choice currently with the first MFI to go public setting all kinds of standards on the spiciness scale.
An industry that was pretty much uniformly admired when it first came to international prominence with Mohammed Yunus and Bangladesh's Grameen Bank is now looked upon with suspicion due basically to:
1) Lending rates that look high but are quite similar to the cost of borrowing on a credit card for example. Also given the small size of their loans and the cost of related administration and the cost of funds there may not be much room for rates to decrease;
2) The publicity of the money made by founders and early investors in the first MFI (there I go again) to go public has been quite in contrast to the goodwill Grameen Bank for example generated by making financial independence possible for so many. However, the profit motive is essential for any industry to attract significant investment and to grow - isn't it?
3) Something that often happens in India is some early success in a new industry is followed by several entrants with sometimes poorly thought out business plans - this happened in software, in BPO, in clinical research and is now happening in Micro-Finance. Some collection practices have been questionable, have allegedly led to some suicides among delinquent borrowers (an alarmingly prevalent problem with the unregulated village moneylenders by the way) and hence more controversy. There is clearly a need for appropriate regulation which does seem to be in the works - India is fortunate to have a generally quite competent central bank - the regulator taking the lead.
Therefore, as is so often the case, there is much ado about not that much. Like many other industries in India - there will be a few survivors who will grow sustainable businesses (at this point there isn't clear visibility as to who they might be) while several new entrants will lose money for investors eager for a quick return. This has happened before and will happen again.
As an investor, I will pass on the supposedly superior returns this industry could offer and if a mutual find I'm invested in has some exposure I'll limit my exposure to that.