Breaking Down India's Microfinance Industry: A Growth Story

The microfinance industry in India has come a long way since its inception in 1974. 

The industry is a vital tool for promoting financial inclusion and providing small loans and other financial services to poor and low-income households. Clocking a growth of 26% year-on-year amounting up to Rs. 3.24 lakh crore by the end of December 2022, India’s microfinance industry holds an outstanding portfolio. As of September 2022, the gross portfolio of NBFC-MFIs, which control the market with a 38.5% stake and dominate the sector, was over Rs. 2,71,350 crore. The industry's portfolio increased by 16.5 times, from Rs 17,264 crore in March 2012 to Rs 2,85,441 crore as of March 2022.

However, the industry still faces challenges that need to be addressed for inclusive growth.

Structure of India’s Microfinance Industry

Microfinance is a type of financial service that routinely and legally offers modest loans and other financial services to low-income people. It was created as a financial inclusion tool to help poor and low-income households get out of poverty, boost their income levels, and improve their overall living standards. This helps the implementation of national initiatives aimed at poverty alleviation.

The microfinance industry in India is diverse, with a wide range of firms offering low-income consumers financial services such as loans, insurance, and pensions. Small Finance Banks, NBFC MFIs (Non-Banking Financial Company-Micro Finance Institutions), Banks, and Non-profit MFIs are the basic categories used to categorize microfinance market players.

All of these, except for non-profit MFIs, are under RBI(Reserve Bank of India) regulation. In India, lending is guarded by the concept of Joint Liability Group (JLG). JLGs are a group of 5-10 members who join hands to avail of a bank loan, either individually, or collectively. The loan is provided against a mutual guarantee.

Government Initiatives

Microfinance Institutions Network (MFIN), the country's microfinance industry association, has acted as an SRO (self-regulatory organization) since 2010. This has contributed to the creation of a responsible finance ecosystem by allowing the sector to build on strong foundations such as customer protection, an industry code of conduct, and policy advocacy.

The government has then persistently expanded on its existing microfinance infrastructure to push progressive financial incentives to support the country's economy. In a similar vein, the Government of India established the Micro Units Development & Refinancing Agency (MUDRA) in 2015 to refinance collateral-free loans of up to 10 lakhs made by lending companies to non-corporate small borrowers, mostly for non-farm revenue development. MUDRA loans are divided into three categories: Shishu loans (up to 50,000), Kishor loans (50,000 to 5 lakhs), and Tarun loans (5 lakhs to 10 lakhs).

Growth

The third quarter showed a substantial increase in microcredit in the country, fueled by festivities and a recovering economy. Banks involved in microfinance through lending to joint liability group members have grown at a relatively slow 9.2% year on year. Small financing banks grew by 19.6%, while NBFCs gained the most traction (59%). From October 2022 and December 2022, total lender disbursements were Rs 77,819 crore, compared to Rs 70,582 crore during the same period the previous year. There has been a significant surge in loans with larger ticket amounts. Portfolios with ticket sizes ranging from 50,000 to 75,000 had a 45% year-on-year increase and 9.6% quarterly growth as of December 2022.

How the geographical regions fare

As of December 2022, the top ten states accounted for 84.6% of the total gross loan portfolio (GLP). In terms of disbursements during the third quarter, Bihar, Tamil Nadu, Uttar Pradesh, Karnataka, and West Bengal were the top five states, accounting for 56% of total disbursements. The Eastern region led the industry growth at 32%, followed by the South at 27% as of December 2022.

Challenges:

One of the industry's main issues is its highly concentrated character, where it is concentrated in a few states and districts, making it subject to economic shocks and political instability in certain areas. For more balanced growth, it is critical to broadening credit distribution to other credit-deficient areas. Allocating the loan to other credit-deficient areas might provide a bigger boost to the country's microfinance sector. Because microfinance loans are often modest and unsecured, lenders find it difficult to reclaim them in situations of failure or nonpayment. This increases the lenders' operational expenses and has a detrimental impact on their bottom line.

Way Ahead:

In recent years, India's microfinance business has grown dramatically. Yet, concerns such as unequal credit distribution must be addressed in order to achieve equitable growth. The sector must take steps to expand loan distribution and guarantee that the benefits of microfinance are available to the general public. Although the business is governed by the Reserve Bank of India (RBI), better laws and standards are needed to prevent predatory lending practices and guarantee consumer rights are protected.

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