Bangalore: Safatullah is 22 years old and runs a bakery from his home. He needs Rs8,500 to buy equipment and ingredients to increase biscuit production, so that he can sell more cookies to tea vendors. For three months, he’s been running around to raise the money, but has failed.

“No one gives me money. Banks ask for collateral, which I do not have. Where can I go but to the local mahajan (moneylender)?" he said.

While banks may not find Safatullah worth lending to, he looks an apt candidate for microfinance institutions (MFIs). He’s young, earns a livelihood, has the means to repay and can be a part of a cluster for group lending.

Rural spread: A file photo of area managers of microfinance institutions conducting a weekly meeting with borrowers at a village near Mysore in Karnataka. Nearly 80% of the MFI business is concentrated in the three southern states of Karnataka, Andhra Pradesh and Tamil Nadu. Hemant Mishra / Mint

Apart from Bahraich, microcredit may not come easily to the poor, the target customers for MFIs, in Jammu and Kashmir and the North-East as well. MFIs say some of these are areas in which lending would be an unviable business proposition due to various reasons. That may be one reason why there aren’t any truly pan-India MFIs.

Other areas where the lenders aren’t too keen to go include parts of eastern Uttar Pradesh, West Bengal and Bihar, the hilly areas of Himachal Pradesh, the tribal areas of Jharkhand and Chhattisgarh, the more remote regions of Rajasthan and Orissa, apart from Punjab.

MFIs cite safety of their business and staff as the biggest concern. Hyderabad-based SKS Microfinance Ltd, India’s largest MFI and active in 19 states of the country’s 28, said some areas are just too dangerous to operate in.

Elsewhere, the economy isn’t necessarily cash-based, said Suresh Gurumani, chief executive (CEO) of SKS Microfinance.

“It’s difficult to have operations in the tribal areas of Jharkhand and Chhattisgarh as these people have not seen cash," he said. “The only exchange they understand is barter of products."

MFIs say that though they have been present in certain districts of Jharkhand, Chhattisgarh and West Bengal, Naxal-dominated areas such as Midnapore, Purulia and Bankura in West Bengal; Koderma, Latehar, Palamu and Gumla in Jharkhand; Bastar in Chhattisgarh; and Sundargarh in Orissa are now being seen as extremely risk-prone zones.

Other areas are off limits because of criminal activity.

“Titagarh, in the suburbs of Kolkata, is very crime-prone. We wouldn’t like to go to such areas. We become sitting targets. We had a terrible experience there," said Samit Ghosh, CEO of Ujjivan Financial Services Pvt. Ltd, referring to numerous instance of his employees being robbed at gunpoint for the cash they were carrying.

MFIs are also steering clear of regions where political interference can be an issue.

“We try to avoid areas where politicians are associated with moneylenders. In Satara (Maharashtra), local politicians are involved with cooperative societies. In Kolar (Karnataka), moneylenders are connected with politicians and they interfere in other’s business and bully them," said Baskar Babu, CEO of Suryoday Micro Finance Pvt. Ltd.

The hilly areas of Himachal Pradesh and the sparsely populated villages of Rajasthan and Orissa are seen as being commercially unviable due to the distances involved. Richer states such as Punjab are also not seen as favourable, as most labourers in this region are migrants.

In such areas, the need for a small loan of Rs10,000 is not very high, they say. Besides, in big cities such as Mumbai, such a loan is too small to make it worthwhile to observe protocols such as the weekly meetings.

While expanding into new areas, MFIs carry out primary and secondary research to gauge the population density of the economically active poor, the uptake of loans, and the presence of self-help groups and non-governmental organizations (NGOs). They also interact with the local police to determine the crime profile.

Historically, the MFI business has expanded from one state to another by filtering through the border areas, which explains the deep penetration of MFIs in the three southern states of Karnataka, Andhra Pradesh and Tamil Nadu. Nearly 80% of MFI business is concentrated in these areas.

Cultural and language differences are also a deterrent in certain areas.

“In Andhra Pradesh, Karnataka and Tamil Nadu, fundamentally women are more liberated. In north India, we face male dominance. MFIs primarily work with women. In the north, women have issues like taking permission from their husbands," said Ghosh.

Local NGOs or self-help groups in such areas will have to become active and start some kind of micro lending business to attract other firms. Customer acquisition becomes easier if people are already aware of how the MFI system works.

In the meantime, the poor of these areas have no option but to go to local moneylenders, who charge usurious rates of interest.

“Generations have been paying interest on loans here and even their homes are mortgaged," said Aftab Alam, who heads an NGO called Bhartiya Manav Samaj Kalyan Seva Sansthan in Bahraich. “There is a huge potential for MFIs, but either due to too much poverty or lack of group formation for lending, they don’t come here." The NGO has been operating for the last 21 years.

Investors, on the other hand, are open to the idea of extending help to MFIs looking at venturing into virgin territory. They say they are ready to back MFIs, even at risk of lower returns, if they get into unexplored markets. If the promoter happens to be a local, it would be an added advantage.

“We are willing to invest at lower return expectations. We know there are risks and may not make money as fast as others," said Venky Natarajan, managing director of Lok Advisory Services Pvt. Ltd, which provides due diligence for investments to Lok Capital Llc, a Mauritius-based venture capital fund that invests in MFIs in India.

Microventure capital fund Aavishkaar India Micro Venture Capital Fund, which has funded five MFIs, is raising a $100 million (Rs463 crore) fund for MFIs operating in difficult areas.

“We feel there is a huge market opportunity in these regions, though it would not come easily," said Vineet Rai , CEO of Aavishkaar India. “The paradigm of risk is high in north India, but the returns could also be huge. In south India, return opportunities are low now due to competition."

The absence of MFIs will stunt growth in these areas, said Viren H. Mehta, director at audit and research firm Ernst and Young India.