Microfinance: Its rising importance and relevance in the Indian economy

Presently, MFIs account for around 40% of the portfolio while the remainder is shared by banks, SFBs and NBFCs. The overall portfolio touched Rs 4.4 trn with around 85 mn unique borrowers last year

The current microfinance models took shape in the nineties as a means of financial inclusion of poorer households. The first model, the SHG Bank Linkage Model, has become a movement and is presently a part of the National Rural Livelihood Mission, a poverty alleviation and employment programme of the government. The Joint Liability Groups, adopted by Microfinance Institutions (MFIs), is the second model, which is more prominent in our country

 

Initially, the MFIs were promoted mostly by NGOs. However, as the model became popular and impactful, many investors came forward to invest in these institutions. At the same time, the regulator also encouraged these institutions to become NBFCs with RBI regulation. This helped these institutions attract investments from impact investors and PE companies, many of whom were based overseas. As a result, we have now vibrant microfinance institutions. 

 

 

Presently, MFIs account for around 40 per cent of the portfolio while the remainder is shared by banks, SFBs and NBFCs. The overall portfolio touched Rs 4.4 trillion with around 85 million unique borrowers last year. However, by the end of the last financial year, it has come down to around Rs 3.8 trillion and 80 million borrowers.

 

The microfinance sector has seen several ups and downs in its journey over the last two-and-a-half years. Since its clients are poor and vulnerable, the sensitivity around it is high and the slightest aberrations in lending practices can become news and invite the attention of many. We saw governmental interventions in Andhra Pradesh in 2010, Assam in 2020 and recently, in Karnataka. Any intervention by the administrators has a significant impact on the sector, both in terms of reputation and credit loss. We have also seen disruptions when external challenges like demonetisation of high value currencies or the Covid-19 pandemic happened. However, the beauty of this sector is that after every such crisis, the sector came back with more strength and better practices. The resilience of the microfinance sector has been seen every time it faced a challenge.

 

One of the reasons for this resilience is the clientele it serves. Poorer people, who are financially excluded, struggle to raise credit from the formal system. Many times, they are also left to the mercies of usurious money lenders. This is where microlending institutions come to their rescue. Many of these MFIs are also involved in developmental activities which also benefit the borrower. Hence, around 80 million poor households are attached to microlending institutions for their needs.

 

Microfinance, in the past one-and-a-half decades has shown remarkable growth, despite several challenges it faced, including demonetisation and Covid. The main reason behind this growth is the huge unmet demand at the bottom of the pyramid, which is being partially addressed by microfinance. According to an NCAER study, there is a microfinance potential of Rs 17 trillion by 2027. We have reached only a quarter of that. If we add the SHG bank linkage data also, it may be less than one-third of the projected potential. Hence, the loan outstanding of Rs 4 trillion is  not surprising. 

 

The growth of microfinance after the Andhra crisis in 2010 has been nothing less than amazing. It grew from Rs 24,332 crore in 2011 to around Rs 3.80 trillion in the last financial year, a whopping 16 times. How did this growth happen? Several enabling ecosystems like credit bureaus providing credit data in real time, JAM trinity making digital transfer of funds, digitisation of loan sanction process from souring to loan disbursement and UPI supporting the digital payment and collections have been developed since then. These enabling ecosystems, along with the unmet credit demand, boosted the credit disbursement and growth of MFIs. It has been amply proved that recovery levels in microfinance has been always exemplary, including during Covid-19.

 

The sector is once again facing some challenges in the last few months, due to over leverage and repayment stress. The fact is that the sectoral leaders realised the issue well in advance and took remedial steps along with SROs to address this issue. As a result, the damage has been reduced and the sector is on the path of recovery. In all probability, it will come back to its original shape in another one or two quarters.

 

As the saying goes, 'microfinance can be loved or hated, but can’t be ignored'. It is the only source of credit to millions of households in our country and poor people realise this. As a result, they take care to abide by the terms of micro credit, including timely repayment. In the absence of this, a sector, which caters to more than 80 million households, would not have been successful, for the past several years.

 

The author is the ED and CEO of Sa-Dhan, an SRO for MFIs.

 

(Disclaimer: These are the personal opinions of the writer. They do not reflect the views of www.business-standard.com or the Business Standard newspaper)