Credit and finance for MSMEs: While microfinance has emerged as one of the most important tools to foster financial inclusion in the country, reaching out to people in 28 states and nine territories, its spread is not evenly distributed, according to M. Rajeshwar Rao, Deputy Governor, Reserve Bank of India (RBI). Speaking at an event assessing the impact of microfinance on the overall macro economy, Rao said while microfinance is present in almost all nooks and corners of the country, in terms of geographical distribution, 82 per cent of the loan portfolio is concentrated in ten states. “Hopefully, going forward the spread could be diversified.”
In terms of regional distribution, the eastern and northeastern regions of the country have the largest share at 37 per cent followed by the south at 27 per cent and the west at 15 per cent. As on 30 June 2022, the total microfinance loan portfolio in the country stood at Rs 2.93 lakh crore, in which banks held the largest share of 38 per cent followed closely by non-banking financial company-microfinance institutions (NBFC-MFIs) at 35 per cent.
Small finance banks, other NBFCs and other entities had a combined share of 27 per cent. The data was shared by Rao at the launch of NBFC-MFIs’ association MFIN’s India Microfinance Review report on November 4. A copy of his speech was released on the RBI’s portal on Monday.
Taken together with the loan portfolio under Self Help Group (SHG)-bank linkage, the overall size of the microfinance loan portfolio is around Rs 4.82 lakh crore. RBI’s SHG-bank linkage programme focuses on helping people with lower income access financial services. Rao said the microfinance loan portfolio across all lenders is roughly 15 per cent of the aggregate NBFC credit from a macro perspective.
Importantly, the central bank in March this year had launched a revised regulatory framework for microfinance loans to remove the interest margin cap on lending rates for microfinance companies to bring them at par with other lenders including banks. According to rating agency Crisil, this is one of the factors that will support a revival in the profitability of NBFC-MFIs this fiscal. Over the past two fiscals, the annual credit cost of NBFC-MFIs had shot up to around 4-5 per cent because of pandemic-related provisioning, versus around 1.5-2.0 per cent prior to that.
Rao also underscored the strong case for technology adoption in the microfinance sector to not only improve efficiencies and bring down operational costs but to also mitigate operational risks such as frauds, enhance service experience and create customer awareness.
“Microfinance lenders with their high-touch models are best placed to handhold their customers for developing familiarity with technology which will enhance their awareness about the opportunities available to them,” he said. This way, the lenders can go beyond a transactional arrangement of just meeting the credit needs of the borrower to a transformational relationship with the customers resulting in positive externalities in terms of the social benefits, he added.