Microfinance industry needs this much money to maintain growth, and be cautious of this pitfall

By: |
January 13, 2020 6:36 PM

The microfinance industry in India, which has helped bring financial inclusion to millions of rural families and women, will need an additional capital of up to over Rs 5,000 crore to meet the target of 25-30 per cent growth per year for the next three years.

The overall microloan market was reported at Rs 2.9 lakh crore as of September last year.

The microfinance industry in India, which has helped bring financial inclusion to millions of rural families and women, will need an additional capital of up to over Rs 5,000 crore to meet the target of 25-30 per cent growth per year for the next three years. The domestic microfinance sector witnessed a robust double-digit growth of 36 per cent during 12 months ended September 2019, ratings agency ICRA said in a research note. The overall microloan market was reported at Rs 2.9 lakh crore as of September last year on the back of good growth of banks, small finance banks (SFBs) and larger NBFC-MFIs that were relatively well placed on the liquidity front, according to the note.

Good job, now watch for this

The microfinance sector is likely to grow 25-30 per cent in the current fiscal. Supreeta Nijjar, Vice President and Sector Head, Financial Sector Ratings, ICRA said, “While the sectoral growth and asset quality have been good, there has been a rise in the share of loans at higher ticket sizes and individual loans.” Thus, while the growth prospects remain good, microfinance institutions (MFIs) need to conduct more involved and thorough credit analysis/assessment of the actual debt repayment capacity of the borrower.

“Further, the risk management policies of the lenders in the sector need to be aligned to ensure responsible and sustainable growth,” said ICRA. It also mentioned that investors continued to support the industry with equity infusions of around Rs 5,400 crore in FY19 and Rs 1,200 crore in FY20 as of now. However, given the growth targets of 25-30 per annum over the next three years, in ICRA’s opinion, these players would need external capital of Rs 3,900-5,300 crore during this period.

Inclusive growth

The microfinance sector has witnessed a healthy growth over the years and the industry has evolved over the last two decades, reaching over 25 per cent penetration level in the total addressable market in 2019. It is to note that the biggest target group involved in India is women in rural areas and account for 99 per cent of the beneficiaries of microfinance in the country. This has further helped bring financial inclusion to millions of rural families.

The sector has also been serving a crucial purpose in the Indian economy, which has been driven by many factors. Meanwhile, the Reserve Bank of India (RBI) has been closely examining the sector in order to protect borrowers and lenders as a high level of financial risks is involved.

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