In the run-up to the vote-on-account in February, the microfinance industry is urging the government to facilitate funding to small and medium-sized lenders. Easier access to funds will help these entities expand their reach and cater to the under-banked customer segment, say experts.
“Government may consider creating a special fund similar to India Micro Finance Equity Fund (IMEF) within Nabard for extending equity support to small and upcoming MFIs. An amount of Rs 250 crore may be provided,” said Jiji Mammen, ED and chief executive officer, Sa-Dhan.
Mammen has also urged the government to create a guarantee fund for the smaller microfinance institutions with National Bank for Agriculture and Rural Development (Nabard) subsidiary Nabsanrakshan.Through the subsidiary, Nabard can extend a guarantee cover for the borrowing of lenders from banks and financial institutions.
The gross loan portfolio of microfinance institutions rose to Rs 3.8 trillion as on September 30 from Rs 3 trillion a year ago, latest data from the microfinance industry network (MFIN) showed. Microfinance-focussed non-banking financial companies (NBFCs) held a 40% market share in the segment, followed by banks at 32%, and small finance banks at 19%. Diversified NBFCs held a 9% market share in the segment.
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 expanding their operations further. Some microfinance institutions provide integral housing loans and water sanitation and hygiene (WASH) loans. These 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. Here, Reserve Bank of India (RBI) and development finance institutions should work together to offer a refinance facility in a bid to lower interest rates, say experts.
Currently, many non-governmental organisations and development institutions are operating in far-flung areas that do not have access to microfinance. Here, creation of a transformation fund will enable many of these entities to upgrade into microfinance institutions, and play the role of a financial intermediary in the hinterlands, say experts.
“MFIN has been advocating for a dedicated funding support for microfinance institutions with special focus on small and medium sized institutions. There is no suitable guaranteed mechanism available for the sector,” chief executive officer and director Alok Misra said, adding that a sector specific guarantee scheme will help boost the credit rating of microfinance institutions as well as their ability to expand to difficult areas.
With easier access to funds, experts feel that microfinance institutions will be able to provide affordable financing to a wide range of customers, specifically women entrepreneurs.
“Adequate funding support, especially through microfinance, can effectively foster women’s entrepreneurship spirit at the last mile and help them pursue their chosen economic activities, said Udaya Kumar Hebbar, managing director, CreditAccess Grameen.
Muthoot Microfin CEO Sadaf Sayeed feels that in addition to funding support, incentives for adoption of digital financial tools by microfinance institutions and their borrowers could also be beneficial.