By Alok Misra
The recent RBI guidelines on microfinance were a game changer for the microfinance industry, positioning it in such a way as to leverage its resilience built over the years. An RBI report stated that the impact of Covid on the financial sector was much lesser than on other sectors because of the critical policy measures implemented during the troubled times by the central bank and the finance ministry. The microfinance sector, which caters to the credit requirements of over 60 million low-income borrowers, is well-positioned to meet the unmet credit demands of a largely untapped market.
As per the India Microfinance Review FY2021-22, the microfinance market’s potential size is likely to touch `25 trillion by 2025-26. The Union Budget 2023-24 provides an opportune moment to provide the necessary impetus to the sector to meet the aspirations of the poorest sections of society. While the sector consisting of diversified regulated entities (Banks, SFBs, NBFC-MFIs) is doing its bit in bridging the inclusion gap, a few policy steps would help in achieving the goal. The three major issues requiring policy support are: Restarting the credit guarantee scheme for MFIs; creating a dedicated refinance facility for NBFC-MFIs, and providing enhanced equity support through the India Microfinance Equity Fund (IMEF). If the Union Budget covers these aspects, it will be a great help for the microfinance sector in pursuit of the government’s objective of inclusive growth.
Since the liquidity stress of small and medium-sized NBFCs (non-banking financial companies) continues post-Covid, it is essential to restart the credit guarantee scheme, launched during the second wave of Covid in 2021. The scheme, by providing a guarantee cover to banks’ term lending to NBFC-MFIs, ensured smooth flow of credit to the needy low-income households. In 2021, 38 NBFC-MFIs received over Rs 7,200 crore, which was further lent to almost 1.775 million microfinance borrowers. However, to achieve the objective, it will be useful if the guarantee scheme focuses on funding NBFC-MFIs below MFR2 grading/having lower credit rating — to fully achieve the scheme’s original intent of providing liquidity to small and medium-sized MFIs (below Rs 1,500-crore portfolio). Additionally, a certain percentage of funding — around 40% — by banks to MFR3-graded institutions and below must be earmarked to guarantee access to funding. The guarantee scheme reduces the risk perception of the banks — although there has hardly been any case of default in the sector — and allows the much-needed credit flow to those at the bottom of the pyramid.
It is also vital to create a dedicated refinance facility in the Small Industries Development Bank of India (SIDBI) for further lending to NBFC-MFIs, designed to suit the terms and conditions of different MFIs. Currently, banks’ lending to NBFC-MFIs has co-terminus tenure with MFI loans tenure to clients; this does not give any flexibility and can lead to asset-liability mismatch. Refinance by DFIs (development finance institutions) like Nabard and SIDBI is for a longer tenure and more suited to MFIs.
It can be done either through the priority sector lending shortfall route or equity contribution. The UK Sinha Committee on MSMEs had also recommended creating such a facility. The Standing Committee on Finance (2021-22), in its report on ‘Strengthening credit flows to the MSME sector’, has also highlighted the role of NBFCs in meeting the credit needs of MSMEs. It has also suggested growing the balance sheet size of SIDBI through equity contributions. That amount can be leveraged to raise funds from the market by the DFI. As such, such a dedicated refinance facility can be created either through the priority sector shortfall route or equity contribution to SIDBI.
Finally, providing equity support to NBFC-MFIs is also critical because their ability to borrow from institutions depends on their capitalisation. Hence, capital support to smaller MFIs (microfinance institutions) through the India Microfinance Equity Fund (IMEF) would greatly help. Mobilising equity has been the primary challenge for smaller MFIs because they need help accessing low-cost debt from banks to fulfil their clients’ credit needs and ensure their sustainability. The corpus of IMEF with SIDBI stands at Rs 310.8 crore as on March 31, 2022, as per SIDBI’s annual report 2021-22. This needs to be enhanced to at least Rs 1,000 crore.
Today, microfinance operates in 633 districts across 32 states and Union territories. It has an outstanding credit portfolio of `3 trillion. This sector’s growth is imperative to ensure inclusive growth and meet the country’s $5-trillion economy target.
A recent NCAER report finds that the sector, besides having impressive outreach, also leads to creation and sustenance of 12.8 million jobs per year and contributes 2.03% to India’s GDP.
The above initiatives will further cement the policy support provided to the sector to help it tide over Covid and ensure that the Indian growth story is inclusive, and focussed on job creation and development of small enterprises.
(The author is the CEO and director of MFIN, an industry body for microfinance institutions and an RBI-recognised self-regulatory organisation)