In a move aimed at stimulating the growth of micro-finance sector and populating the sector with hundreds of more players, the government may unveil a special fund to give equity support to the sector in the Budget FY26. According to official sources, ‘small and mid-sized’ microfinance institutions (MFIs) would be the main beneficiaries of the fund, as these are expected to play a big role in extending collateral-free credit to low-income households.

The Centre had, in 2013, created India Micro-Finance Equity Fund’ (IMEF), with a corpus of Rs 100 crore under the Small Industries Development Bank of India (Sidbi). Though the IMEF is also designed to provide equity to smaller MFIs and help them maintain growth and scale up, the conditions linked to transfer the funds and the eligibility norms have been proven to be cumbersome.

The new fund, the sources said, would come with much relaxed restrictions. It may either be managed by any development financial institution like Sidbi or Nabard or a separate institution may be created for smooth transfer of funds, they added.

MFIs issue small-value loans and provide banking services to the underserved populations in the country. As of today, there are more than 200 MFIs in India, and among them about 80% are of small and mid-sized category.

The Reserve Bank of India (RBI) regulates MFIs in India through the Non-Banking Financial Company-Micro Finance Institutions (NBFC-MFIs) framework, issued in July, 2014.The combined loan outstanding of the MFIs stood at around Rs 1.7 lakh crore as on 31st March, 2024. And 60% of this amount has been lent by large MFIs.

Jiji Mammen, chief executive officer, Sa Dhan, said: “Increasingly, we’re witnessing that smaller and mid-sized MFIs, including those having portfolios of Rs 1,000-2,000 crore, are facing difficulty in getting loans from banks, Nabard, Sidbi etc.“Only 15-20 large MFIs are getting such loans for their operational needs. There is an urgent need to create a refinance window for small and mid MFIs, as well as create an equity-support fund,” he added.

Currently, around 70% of the loan portfolio of the microfinance sector is in around top 200 districts. However, a lack of sufficient funding avenues makes it challenging for many microfinance institutions to expand their operations further. Some microfinance institutions provide integral housing loans and water sanitation and hygiene (WASH) loans. These WASH loans are typically priced at an interest rate of 20-26% with lenders looking to mitigate the impact of the high cost of funds.

While the demand for such loans is prevalent, the high interest rates make it difficult for customers to afford these activities. Thus, the RBI and development finance institutions (DFIs) should work together to offer a refinance facility in a bid to lower interest rates, say industry sources.

Vivek Iyer, partner, Grant Thornton Bharat said: “Given the concentration of liquidity sources due the limited alternatives, a special fund created to provide funding for expansion of MFI operations would help MFIs grow sustainably without exhausting their funding options.”