BS BFSI Summit: MFI industry's full recovery hinges on better liquidity

After quarters of liquidity stress and high delinquencies, India's microfinance sector shows revival signs, though experts say sustained recovery depends on stronger bank and government support

After witnessing quarters marked by liquidity stress, rising delinquencies, and slowing disbursements, India’s microfinance industry appears to be showing early signs of revival, said leaders and analysts during a panel discussion on the micro lending sector at the Business Standard BFSI Summit. 

In conversation with Manojit Saha of Business Standard, industry experts said that the worst may be behind the microfinance institutions (MFIs), but the full recovery hinges on improved liquidity support from banks and the government. 

“Now the situation is better. We have requested the government to institute a larger guarantee fund of say ₹20,000 crores, which will kick-start the virtuous cycle of funding, giving confidence to the bank,” said Alok Misra, CEO, Microfinance Industry Network (MFIN). 

 

“So, that is under active consideration, we hope that can be expedited, and if that happens, things will get better. It is already normal, the momentum will be sustained,” he said. 

Sadaf Sayeed, CEO, Muthoot Microfin said that disbursements have improved, affordability of rural households has gone up, and collections also improved.

 

“I think the inflation has gone down and the crop has been really good, with rains being good. Due to which prices of vegetables or crops have also gone down, increasing the affordability of the rural household. Personally, we are witnessing better collections and better disbursements. Therefore, the trend is towards the positive,” he said.

 

HP Singh, CMD, Satin Creditcare said that his firm will open 400 branches, indicating that stress in the microfinance segment was coming down.

 

“When we say 400 branches, opening at this particular juncture means that the things have come back to normal, means that the growth is coming back. We are hopeful that we will get the credit guarantee scheme as discussed in the panel. Portfolio at risk of 120-180 days has gone down significantly,” Singh said.

 

Industry players pointed out that the lack of liquidity remains the biggest constraint for NBFC-MFIs.

 

“For us, the raw material is money. We do not have the liberty to take deposits like banks. The moment liquidity tightens, our growth stops,” said Singh, noting that many banks have slowed lending to the sector due to risk concerns.

 

Sayeed also said that many smaller MFIs are struggling to raise funds, creating a vicious cycle where reduced lending affects borrower cash flows, leading to higher delinquencies. He added that most players are now focusing on portfolio quality rather than aggressive expansion.

 

On removal of the lending rate cap by the Reserve Bank of India a few years ago, Mishra said that the removal did not cause any pricing or discipline-related issues. “When deregulation happened in 2022, the average weighted lending rate for NBFC-MFIs was around 24 per cent. Today, it stands at 23.62 per cent.”

 

He pointed out that NBFC-MFIs contribute to only 35 per cent of the microfinance market, while banks and small finance banks -- which operated without interest caps -- dominate the remaining share.  

 

“It’s far-fetched to say removing caps for just 35 per cent of the market led to problems,” he said.

 

Mishra said that despite the freedom to price loans, profitability in the sector remains modest, with an average return on equity of about 0.8 per cent and return on assets of 1.8 per cent.

 

Sayeed said globally too, Indian MFIs are among the most affordable.

 

“In Latin America, rates are around 49-50 per cent. Despite not having access to deposits, Indian MFIs charge much less. RBI’s framework, linking rates to cost of funds, credit cost, operating cost, plus a reasonable margin, ensures fair pricing,” he added.

 

Sayeed attributed the current contraction in the overall NBFC-MFI portfolio to multiple factors -- higher perceived risks, localised delinquencies due to floods or elections, and reduced fund flows.

 

“Smaller MFIs are struggling to raise funds. When disbursements slow, liquidity at the borrower level also tightens, creating a ripple effect on repayment and demand,” he explained.

 

On banks developing cold feet in lending to the microfinance segment, Karthik Srinivasan, senior vice president and group head, ICRA, said, “NBFC MFI, it’s a single product company. If you look at a bank, a bank is a multi-product entity. They have the flexibility to move from corporate to retail to infrastructure to agriculture, depending on the flavour of the season and on their risk appetite. Today, they are seeing stress in this portfolio, hence they have slowed down on the disbursements on that side.”

 

On whether MFIs were willing to convert into small finance banks (SFBs), speakers emphasised on sticking to their current area of business.

 

“We are happy being focused on MFIs. With the qualifying asset criteria relaxed from 75 per cent to 60 per cent, we have enough flexibility to diversify within the same space,” said Singh. He added that they are best suited to do microfinance.