K'taka microfinance ordinance effect: MFI loan disbursements may slow down

The assets under management (AUM) of microfinance institutions (MFIs) in the state stood at Rs 60,000 crore at the end of March 2024

The disbursements in microfinance segment in Karnataka may slow down further for the next couple of months amid confusion that follows the promulgation of an ordinance by the state government, microfinance institution (MFI) executives said.

 

Assets under management (AUM) of MFIs in the state stood at Rs 60,000 crore at the end of March 2024, according to Association of Karnataka Microfinance Institutions (AKMI’s) annual report for FY24. 

The state’s MFIs service over 10 million clients and employ over 36,000 who are all from Karnataka.

 

Senior MFI executives said the AUM has declined further as lenders moderated disbursements due to rise in stress and regulatory steps like hike in risk weights.

 

While the ordinance is not applicable to Reserve Bank of India (RBI)-registered banks and MFIs, the lenders would be cautious in conducting business.

 

This comes as the industry awaits clarity on certain aspects of implementation such as penal provisions and ombudsman as they focus on borrower communication. The effect would be a slowdown in business in the current and next month, they added.

 

The Karnataka Micro Finance (Prevention of Coercive Actions) Ordinance 2025 is aimed at protecting borrowers from harassment by MFIs. It has penal provisions, including a jail term of up to 10 years, and a fine as high as Rs 5 lakh for violation.

 

Meanwhile, Sa-Dhan, a self-regulated organisation (SRO) of microfinance companies, in a statement, said this ordinance is a positive step in bringing transparency and bolstering the RBI’s efforts to improve the credit culture while lending to the needy and unbanked.

 

A top executive with an NBFC said while there is short-term pain in terms of slowdown, lenders with better governance and deep pockets will gain in the medium-to-long term. The opportunities for lending are expected to shift to the organised sector which is better regulated with players held accountable for behaviour.

 

Karnataka is among the top 5 states in terms of overall microfinance industry portfolio. The other four states are Bihar, Tamil Nadu, Uttar Pradesh, and West Bengal.

 

These five states account for around 58 per cent of the total portfolio of the MFI industry, according to a report by rating agency Infomerics. 

Move to increase micro loan delinquencies, says India Ratings

 

Karnataka’s ordinance may effect short-term disruptions and impact customer discipline in the near term, said India Ratings and Research on Friday. It may lead to a rise in delinquencies in the current quarter for NBFC-MFIs. This is despite the ordinance excluding banks, NBFCs and NBFC-MFIs and being applicable to unregistered/ unlicensed micro-lenders, it said.