Microfinance sector makes a strong comeback

The MFI sector gained from the favourable economic environment and the revised regulatory framework by the Reserve Bank.

After two years of Covid-induced stress, the economy has bounced back during the last financial year. As a result, the microfinance sector also recorded a steady and sharp growth, with all parameters showing excellent results. The year began with a hopeful outlook as the microfinance industry in India showed encouraging signs of recovery. It continued with no major negative news. However, at a global level, the central banks, particularly of advanced economies, started to increase the interest rates to combat inflationary pressures. This was a departure from their earlier accommodative monetary policies to spur growth during the pandemic. There was an increase of 250 bps in the policy rates in the last 18 months in India. This has increased funding cost for MFIs. Further, with the Covid-related increased credit cost, the overall cost of lending increased during the year.

Apart from the favourable economic environment, the MFI sector also benefitted from the revised regulatory framework issued by the Reserve Bank of India, which became operational from April 1, 2022. All MFIs quickly adapted to the new norms, with the necessary policies approved by their boards.

All this helped the MFIs register a 21% growth in the loan portfolio, which touched Rs 3.52 trillion by the end of the year. The client base also recorded a 19% growth and touched 5.32 crore for the MFIs. At the same time, SHG-bank linkage has also has good growth, with the overall outstanding reaching Rs1.88 trillion and the total SHG linked to banks increasing to 134 lakh and SHG membership touching 16.2 crore. The data for the first quarter indicated a further growth in the portfolio by over Rs 7,000 crore and an year-on-year disbursement growth of 30%. The repayment performance under both the modes recorded great improvement and reached the pre-Covid level. The MFIs had a 90-plus dpd PAR level at 2.4%, including overdue above 179 days. The PAR upto 179 days was almost equal to the pre-Covid period.

MFIs are reported to be currently operating in 28 States, 5 Union Territories, and 646 plus districts in India. However, the data from the Credit Information Burau shows microfinance operations in all 36 States/ UTs and also in 730 districts of the country, which may not entirely correct as there could be some reporting errors. But the concentration of the portfolio continued to be in 10 states with 82% of the portfolio—the top five states accounted for 56%. But, distinctly, there was an improvement as far as fresh borrower acquisition is concerned. It grew by 18%.

The southern region continued to have the upper hand in the share of both outreach and loans outstanding, followed by the eastern region. The proportion of rural clientele is 75% in 2022-23. Women borrowers constitute 98% of the total clientele of MFIs, SC/ST borrowers constitute 23%, and minorities 8%.

MFIs were also active in various kinds of credit-plus activities in their area of operation. This included activities in health, education, water and sanitation, and other community development programmes. Sa-Dhan supported the MFIs in engaging in imparting financial literacy, digital literacy and promoting climate resilient agriculture, water and sanitation products, etc. The RBI-supported DEA workshops are one of the most powerful movements currently taking place, given these impart depositors’ awareness education through 2,250 workshops across the country. Already, 1,500 workshops have been completed , with 54% being in the eastern part of the country, training more than 100,000 poor people (mostly women).

Thus, microfinance has strongly made a comeback, just like any other time of crisis faced by the industry. The resilient power of the industry was shown once again. This was seen after the crisis of demonetisation induced severe difficulties. So was the case with Covid too.

But, if the sector has to grow further, some more steps from the regulator and the governments are required. One, the data regarding indebtedness is incomplete. Several other modes of lending in the same space like SHG-bank linkage, Nidhi companies, fintechs are not being captured by the credit information companies. This is resulting incomplete assessment of indebtedness. Two, the disruptions in the sector by vested elements is a constant headache. There is an organised campaign against loan repayment that is vitiating the lending atmosphere. Third, the funding needs of the MFIs have to be met, so that they have sufficient working funds for their operations. This is especially required for the smaller ones that struggle to get funds, especially from banks and financial institutions. This also increases their lending rate. A specialized funding institution like the Palli Karma Sahayak Foundation (PKSF) of Bangladesh will help expand credit and bring in new players. Fourth, the government must recognise the role MFI lending as a mainstream financial activity and support its growth.

Jiji Mammen, Sa-Dhan ED & CEO, penned this piece for Financial Express.

Views are personal and do not represent the stand of this publication.