Microfinance has seen tremendous growth over the years, and as per various reports, a large population still lacks a savings account, while several families and individuals come under the low-income bracket. The whole microfinance idea is not new, as it was setup way back in 1974 in Gujarat to help women. Soon, the concept gained traction and is a booming business in India.
Microfinance over the last five years in India
Since its inception, the microfinance sector has grown approximately 16.5 times – from Rs 17,000 crore to Rs 2.85 lakh crore – from 2012 to 2022, as per a report by MFIN. The unique debtors have also significantly grown to 7.4 crore as of December 2023. Wise lending practices and efficient operations have played a tremendous role towards the growth while profitability has also seen an increase.
Currently, MFI-led Joint Liability Group (JLG) programs and bank-led Self-Help Group (SHG) activities together serve approximately 17 crore households in the country, meaning nearly every second household in India benefits from the sector. While the microfinance industry’s assets accounts for merely 4 percent of total bank credit, microfinance contributes 3 percent to the GVA of the economy, as per an NCAER study.
However, there have been setbacks as well, and one of the biggest was the pandemic in 2020. While the sector has bounced back, there are a few pressing concerns that need to be addressed — the biggest being the interest rates, as they are often more than that charged by commercial banks.
Another persistent concern is the operational costs, as small loan portfolios and expensive credit risk management can heighten operational costs, making it hard for microfinance companies to attain financial success.