Microfinance Credit - a Growth Story
Understanding Microfinance
Microfinance services are provided to unemployed or low-income individuals because most of those trapped in poverty, or who have limited financial resources, do not have enough income to do business with traditional financial institutions. Despite being excluded from banking services or recently connected through PM’s Jan-Dhan Yojna , however, those who live on as little as Rs 500- 800 a day do attempt to save, borrow, acquire credit and they do make payments on their debt.
Microfinance allows people specially Women of the family to take on reasonable small business loans safely, and in a manner that is consistent with ethical lending practices. Unlike typical financing situations, in which the lender is primarily concerned with the borrower having enough collateral to cover the loan, most of microfinance organizations focus on helping women entrepreneurs succeed.
I have recently worked on a Project with a microfinance and am amazed with the discipline of the processes being followed to onboard a Client and a center. Financial education and oath Taking process reminded me this practice being used in some tuck Unions in Punjab where driver Taking Loan on Trucks on guarantee of unions were subjected to an Oath in presence of god they worshiped.
Getting Loan is a Quick process, Most players use digital means for Client KYC and Loan Applications, Have strong Appraisal processes digitally. Literacy on ground of the processes is amazing . technology is being leveraged by most Microfinance Companies to attain scale and reduce operational cost.
Size of Industry and Trends :
The microfinance industry grew 26% year-on-year to Rs 3.24 lakh crore at the end of December 2022, backed by about 43.4% growth clocked by NBFC-MFIs. The massive jump in their gross portfolio cemented NBFC-MFIs' dominance in the sector with 38.5% market share. Only three months back, NBFC-MFIs regained their leadership in lending to the economically weaker section by overtaking banks (ref : Economics Times ) .
Growing Microfinance Sector :
According to TechSci Research report, the microfinance market in India is anticipated to grow at a brisk CAGR of more than 40% during 2021 – 2025, predominantly on account of increasing demand for microfinance loans from the country’s MSME sector. The main objective of microfinance organizations is to provide a chance to low-salary borrowers to become self-sufficient. This sector plays an important role in promoting inclusive growth by providing credit to borrowers who fall under BPL category. This industry is also helping the women, especially from rural areas, to avail small loans at affordable rates. The Pace of growth had also accelerated as of regulatory opening up of the Norms of lending and relaxing the rate margins from April 2022.
By End-Use, the market is segmented into Agriculture and Allied, Services, Trade & Business, Education, Production/manufacturing, and others. Agriculture and Allied segment dominate the end use segment of microfinance market in India.
A Word of caution :
As demand is high of Microfinance loans, a trend is seen that most MFIs NBFC are moving some of their portfolios to Individual Loans, going away from Joint Liability group ( JLG ) loans to individual loans the credit risk Takes a Sharp turn. The trend will start increasing the Collection cost for Companies and losses may inch up. A client of Microfinance is very different from an Individual Loan Account as these women clients do not have any Visible Income through Banking analysis or ITR returns, Nor there are any collaterals Backing the loans. Success of the recoveries is as of the group pressure and discipline imposed on the groups, want and availability of repeat Loans to same group once 75% is Paid. I fear the clients’ women Entrepreneurs who have lack of Financial Understanding may be overleveraged by bankers / NBFC over few years as Individual borrowers and we ourselves kill a healthy performing Client Segment.
