It would help if MFIs were to get better funding: Sa-Dhan ED & CEO

Microfinance institutions (MFIs) are under stress. The Financial Stability Report of December 2024 notes that in the first half of 2024-25 (H1FY25), the share of stressed assets in the 31-180 days-past-due segment rose to 4.30 per cent from 2.15 per cent in FY24. JIJI MAMMEN, executive director (ED) and chief executive officer (CEO) of Sa-Dhan, a self-regulatory organisation for the microfinance sector, interacted with Raghu Mohan in a telephonic interview on issues facing MFIs. Edited excerpts: 

 

How do you think the Karnataka Microloan and Small Prevention Ordinance, 2025 will impact MFIs? 

The Ordinance has excluded Reserve Bank of India (RBI)-regulated entities (REs) which are in this business. But it has created collateral damage for the sector. The common person on the field may not be able to differentiate between REs and non-REs. Then, borrowers may also use this to their advantage: they can take the alibi of the Ordinance to say it has exempted them from repayments. We have seen collections dip after the Ordinance was issued on 12th February. It was something like 95-96 per cent earlier, but has gone down to around 85-90 per cent. But I feel that in one or two months, people will start realising the issues involved and normalcy will return. 

It is said the problem starts at the on-boarding stage. But when you have Aadhaar and other identity proofs which are interlinked, what is the issue out here? 

Until 2015, Aadhaar was being used for on-boarding. But after the SC (the Supreme Court) order, it has been removed as a primary identification document. Hence, most of the MFIs depend on other documents like voter-IDs, ration cards, driving licences, or PAN cards. The most popular are voter-IDs, but there is no Aadhaar linkage to it. It’s also easy for people to get multiple voter-IDs. Now non-banking financial companies (NBFCs) can use Aadhaar in a limited way through the e-KYC route.   I understand around 20 NBFC MFIs have been given the nod from the RBI, but it is still pending with the Unique Identification Authority of India (UIDAI). Hardly three or four (or maybe less) NBFC-MFIs have got the approval from UIDAI. Another point is that while you can use Aadhaar for the purpose of e-KYC identification, you cannot use it for reporting to the credit bureaus. And in credit bureaus, the major issue is with identity matching. 

Is it possible for MFIs to track the end use of funds? 

It’s difficult. First of all, borrowers are from the informal sector, and their requirements are multiple in nature. But I strongly believe there should be some kind of cross-checking so that the money released is not entirely used for unproductive purposes. If the money is taken for buying cattle, at least the MFI should make sure that the borrower has some cattle and some part of the money is used for that purpose. An end-use verification will dissuade borrowers from completely diverting it.  There is another aspect to this. The money borrowed goes into the common kitty of the household, and is used for a more urgent need. But I strongly feel there should be some end-use verification. 

But assume for a moment, a customer diverts a cattle loan to buy a mobile. Even if the MFI came to know, what can it do?

The MFI cannot recall the loan because the customer will not be able to repay in one go. But an utilisation verification can make people aware that there is somebody watching over you. This will help in avoiding gross mis-utilisation or diversion of funds as we have seen in some pockets where you have ring leaders who take the money from borrowers on the promise of higher returns and end up fooling them and the MFI. 

What are your views on MFI funding? 

The main problem is MFIs depend on borrowed money, they cannot tap deposits. In many Latin American and South Asian countries, they have been allowed to take savings from members. In Bangladesh, up to 80 per cent of the outstanding loans can be raised as savings from borrowers. An advantage of this is borrowers can get cheaper loans as the interest paid on savings is about five or six per cent. It also leads to a stronger connection between borrowers and MFIs. In India, RBI does not like to have NBFCs taking deposits. But, if such a facility is available, it will be beneficial to the MFIs. After the Andhra MFI crisis in 2010, the India Microfinance Equity Fund (IMEF) was created in 2013. The problem with the IMEF is the rigid conditionalities around it.