By Manish Kothari
Microfinance: India’s microfinance sector is poised to grow in the near to medium term, fuelled by a burgeoning economy, a growing hunger for credit, deepening UPI adoption among its established user base and the level playing field offered by the Reserve Bank of India (RBI) after its landmark regulation issued in 2022. The MFI sector has performed well during the last financial year, conclusively leaving its Covid blues behind.
Microfinance in India has come a long way, emerging as a major avenue to meet the needs of lower-income households by connecting them to financial resources for both productive and critical needs. The business has now spread to the vast hinterlands of India thanks to the outreach of NBFC-MFIs, increasing interest of Commercial Banks, Self-help Groups (SHGs) and the NRLM (National Rural Livelihood Mission). The introduction of small finance banks as a new category of banks and the increased focus of major private sector banks further reinforced the impact of the sector among underserved and low-income households.
The MFI industry has been through the vagaries of many economic ups and downs, eventually becoming resilient and now, one of the most impactful lending segments in the country. The true effect of this growth curve can be felt in the financial and credit inclusion of scores of under-banked and unbanked Indians across rural areas, thereby bridging a crucial gap.
Also read: Microfinance gross loan portfolio jumps 18% in FY23; write-offs up by 7.7%: Report
Creditable performance in FY23
As of FY23, the MFI sector is serving 66 million borrowers with an outstanding loan amount of Rs 3,48,339 crore and an overall portfolio growth of 22% during the year, as per data from industry body MFIN. The share of microfinance loans within total credit dispensed stood at 1.3% as of FY23, up from 0.9% in FY18. The growth in the microfinance industry has been driven by an increase in the number of unique borrowers and a rise in the average ticket size.
Reports point out that the number of loan accounts has increased from 76 million in FY18 to 130 million in FY23 while the number of unique borrowers has gone up from 49 million in FY19 to 66 million as of FY23.
The microfinance sector has so far generated a significant impact, creating 128.46 lakh jobs through direct, indirect, backward, and forward linkages, according to NCAER. By and large, the digital route was also adopted since 2017 through online delivery channels, mobile banking, and e-wallets.
Growth prospects and reasons
The industry has shown an amazing ability to adapt, particularly from the impact of first, demonetisation and then Covid which led to major debt restructuring and payment deferrals. The new regulations levelling the playing field for all players announced by the RBI in March’22 are expected to result in positive growth and improved margins for the sector as the RBI allowed microfinance lenders to fix interest rates on loans with a rider that those should not be usurious for the borrowers thus allowing competition to offer optimum rates to borrowers. Hence, the common regulatory framework is expected to create a level playing field as both borrowers and lenders will now have options.
The new framework will safeguard the interests of the borrowers and help the sector cater to needy borrowers. These regulatory changes have created a ground that can bring about a transformation, bridging the gap between rural and urban markets.
Thanks to increasing digital adoption by players in the sector, customer onboarding, loan processing as well as collections are increasingly becoming tech-driven. The industry also uses mobile handheld devices to capture and geo-tag customer locations and has integrated Aadhaar and Mobile to reduce costs of operations and improve efficiency. The introduction of UPI and digital means like QR codes for payments have brought a significant degree of familiarity and comfort to traditionally cash-dependent microfinance customers motivating them to adopt more efficient digital means.
Women in rural India, in particular, are gradually embracing these changes, signifying a more inclusive and dynamic landscape. The sector’s growth and adaptability are expected to play a crucial role in promoting financial inclusion and socioeconomic development, especially in rural areas, where formal financial services are essential for improving livelihoods and empowering individuals.
Rising challenges
However, a geographical analysis reveals that MFIs’ penetration remains low in some of the states such as UP, Gujarat, Maharashtra and Rajasthan, and these markets can provide healthy growth opportunities. Similarly, the diversity in the customer segments such as small farmers, vendors and laborers and the familiar, but over-dependence on physical modes of interaction, limited awareness of financial services among the borrowers and
reaching the last-mile borrowers effectively continue to pose challenges. So also, on their part, microfinance players will need to put additional efforts to spread financial and digital literacy among low income households.
Need for innovations
To play a decisive role in India’s historic journey to be a $5 trillion economy by 2025 and then to be a developed nation by 2047, the industry also has a responsibility to shoulder. Like the rest of the retail asset segments, microfinance players need to innovate products and services, introduce technology in operations and marketing, and reduce operating overheads to stay viable.
Also read: ‘Why microfinance institutions might not be working in favour of women empowerment’
Industry surveys show that innovative products that factor in the impact of vagaries of business seasonality on repayments and flexible repayment options deployed by other businesses such as credit cards etc are likely to attract more borrowers and provide convenience to existing customers. In fact, the innate understanding and connection with the customer is the core strength of microfinance and hence providing them with flexible terms that align with their cash flows would enhance this relationship.
Industry watchers expect the sector to grow at a healthy over 20 per cent loan CAGR over FY23-25 reaching larger numbers of underserved households. Despite the crippling crisis in 2010 and taking several body blows in the subsequent years due to extraneous factors, a consolidated effort by all stakeholders in supporting the sector aided by technological innovations and increasing customer resilience have brought the sector to a strong footing today. From this position now, the microfinance industry is on course to become a larger player in the BFSI space and holds the promise to significantly contribute to the economic growth of the country.
Manish Kothari is President and Head – Commercial Banking, Kotak Mahindra Bank Ltd. Views expressed are the author’s own.