Empowering Growth: The Evolving Landscape of Microfinance in India

Microfinance firms are poised for a significant surge in lending activity as the deadline for implementing the revised norms set by the RBI draws to a close.

Originally slated for April 1st, the deadline was extended to October 1st due to the challenges encountered by these institutions, as acknowledged by the Reserve Bank.

Thanks to timely adherence to the recent RBI guidelines issued in March of this year, microfinance firms are ready to cater to the escalating demand for credit.

The revised RBI guidelines usher in several key changes, including the establishment of a unified household limit of Rs 3 lakh for such loans, eliminating the distinction between urban and rural households.

Moreover, microfinance lenders must now ensure that loans are devoid of collateral requirements and not tied to a lien on the borrower’s deposit account, while adhering to capped repayment obligations.

Additionally, the RBI has upped the maximum indebtedness per borrower to Rs 2.4 lakh and eliminated margin caps, specifically targeting NBFC-MFIs.

The previous criterion, which factored in household income, resulted in a significant number of loan application rejections. However, entities involved in microfinance, such as banks, small finance banks, and NBFCs, have now implemented mechanisms and systems to comply with the RBI norms.

Micro loan growth continues to be robust, with loans to micro-borrowers witnessing an 18% year-on-year increase in the June quarter, driven by effective delinquency management by lenders.

Despite this growth, the lending landscape remains skewed towards the top 10 states, with Tamil Nadu and Uttar Pradesh alone accounting for 84% of the microfinance portfolio this year, according to a report by credit bureau CRIF high Mark.

However, there are positive signs regarding asset quality within the sector. Data from the credit bureau indicates an improvement, with loans overdue for more than 30 days dropping from 6% in March 2022 to 5.8% in June 2022, and those overdue for more than 90 days decreasing from 2.7% to 2.2% during the same period.

Furthermore, borrowers are gradually re-entering the market following the post-Covid slowdown, with a 1.6% quarter-on-quarter increase in the live customer base and a 5.1% year-on-year growth.

While rural markets experienced a slight increase, urban markets witnessed a marginal decline as of June 2022. Gross loan portfolio for rural markets surged by 22%, compared to 13% for urban markets compared to June 2021.

In terms of market dominance, banks continue to hold the lion’s share, with a 35.6% portfolio share, despite a 5.6% dip in portfolio size during the year. Meanwhile, the gross loan portfolio of NBFC MFIs saw a 2.2% quarter-on-quarter increase, compared to 2.6% for small finance banks (SFBs) as of June 2022. Year-on-year growth stood at nearly 33% for NBFC MFIs, 2.1% for banks, and 22.5% for SFBs.

Notably, approximately 45% of banks’ portfolios consist of loans exceeding Rs 50,000 in size, in contrast to 27.2% for NBFC MFIs and 31.3% for SFBs.

The dominance of certain states persists, with Tamil Nadu, Bihar, West Bengal, Karnataka, Uttar Pradesh, Maharashtra, Madhya Pradesh, Orissa, Rajasthan, and Kerala collectively representing 84% of the Gross Loan Portfolio as of June 2022.

Regionally, the Eastern region leads with a 32.6% share, followed by the South with 26.7%, as of June 2022. Banks hold a 43.2% share in the eastern region, while NBFC MFIs and SFBs have concentrations of 28.2% and 36.3% in the East and South regions, respectively.