COVID-19 Offers An Opportunity To Build Long Term Resilience For Indian Microfinance Sector

The Reserve Bank Of India or RBI noted in a latest update that microfinance sector in India fulfils credit needs of people at the bottom of the economic pyramid and acts as a potent tool for empowering women. Microfinance sector has evolved over the years, having endured credit and liquidity distress in the past. The article provides an overview of the microfinance sector in India and studies credit delinquencies and funding patterns of Microfinance Institutions (MFIs). It also attempts to examine the new challenges posed by COVID-19 and its implications for microfinance.

It is observed that early credit delinquencies of MFIs spiked during past risk events. However, recovery was pronounced with microfinance loan portfolio remaining buoyant, albeit, with increased credit costs. On the liquidity front, Infrastructure Leasing & Financial Services (IL&FS) event disproportionately affected small and medium sized Non-banking Financial Company MFIs (NBFC-MFIs), which faced funding constraints while large NBFC-MFIs were able to diversify their sources of funds and sustain credit growth.

While COVID-19 may afflict the microfinance sector with financial risks in the near term, it also presents an opportunity to build long term resilience. Efforts towards digitizing loan collections, leveraging data analytics, and diversifying loan portfolio across geographies, among other measures, can help the sector in transforming the pandemic into new possibilities.

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