New MFIs should enter unbanked regions: Assocham

More microfinance institutions (MFIs) should be encouraged to enter the microfinance sector to reach out to the vast populace of unbanked mass in the country, according to the Associated Chambers of Commerce and Industry of India.

“New MFIs should be encouraged to enter into unbanked areas of the country as it will help in achieving financial inclusion,” Dilip Modi, president of Assocham said here attending a seminar on MFIs here.

He also said fund flow to the sector should be adequate in order to sustain this kind of business model.

MFIs in the country are facing a severe cash crunch as banks are reluctant to lend to this industry after repayment difficulties faced by some players post- Andhra Pradesh Act. Even, the Malegam Committee recommendation and subsequent policy action by the Reserve Bank of India have not changed the situation yet.

Meantime, some MFI loans have been recently restructured by banks in order to ease repayment pressure.

“I hope that banks will be able to filter functioning of various MFIs and will lend them accordingly. Bank lending to this sector should improve given the fact that MFIs are crucial part of financial inclusion initiatives,” he said.

He also said it would be too early to predict a consolidation in the MFI industry post-Malegam recommendations.

According to Assocham, the microfinance industry has Rs 30,000 crore of outstanding loans of 30 million borrowers as of now. The industry size in Karnataka stands at Rs 2,000 crore, which is growing at a sound pace.

“The total number of clients of microfinance has reached 3.2 million apart from the 3 million from 232,000 self help groups (SHGs) in Karnataka. However, this kind of growth is taking place in a better developed and densely populated region of the state. So, I urge MFIs to explore the unexplored regions of the state,” Murugesh R Nirani, minister of industries of Karnataka, said.

He also asked MFIs to maintain close contacts with local administration to make microfinancing more productive and development oriented. Karnataka should also encourage SHG group-based lending to increase repayments from clients.