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  • Microfinance in India: Growth, Challenges, and Path Ahead

Microfinance in India: Growth, Challenges, and Path Ahead

Description

Microfinance in India: Growth, Challenges, and Path Ahead

Microfinance has been a transformative tool in promoting financial inclusion across India. Its evolution, varied models, and challenges provide valuable insights into its critical role in empowering underserved communities.

Tracing the Journey of Microfinance in India

  1. Foundation Years
    • The establishment of the SEWA Bank in Gujarat in 1974 laid the groundwork for microfinance in India.
    • NABARD introduced the Self-Help Group (SHG) linkage model in 1984 to address poverty and encourage collective savings.
  2. Policy Milestones
    • In 2004, the RBI recognized microfinance as a priority sector, marking its importance in economic policy.
    • The launch of MUDRA Bank in 2015 further expanded credit access for small businesses.
  3. Addressing Crises and Reforms
    • The Andhra Pradesh crisis in 2010 prompted a review of recovery methods and led to the establishment of the Malegam Committee in 2012.

Microfinance Operational Structures

  1. Self-Help Groups (SHGs)
    • SHGs consist of 10–20 members who pool savings and access credit under NABARD’s SHG-Bank Linkage Programme.
  2. Microfinance Institutions (MFIs)
    • MFIs work through Joint Liability Groups (JLGs) with 4–10 members, providing credit, insurance, and other financial services.

Categories of Microfinance Providers

  1. NGO-Driven Models: Operate under the Societies Registration Act, 1860, or the Indian Trusts Act, 1880.
  2. Cooperative Structures: Entities like Primary Agricultural Credit Societies (PACS) extend microfinance services.
  3. Section 8 Organizations: Non-profit entities under the Companies Act, 2013.
  4. NBFC-MFIs: Represent the largest market share, regulated by the RBI, and fund their operations primarily through bulk loans.

Current Scenario of Microfinance

  • With 168 MFIs serving over 3 crore clients, the sector has made substantial contributions to financial inclusion.
  • It generates employment opportunities, accounting for 130 lakh jobs and contributing 2% to India’s Gross Value Added (GVA).
  • Microfinance loans are defined as collateral-free loans for households earning up to ₹3 lakh annually.

Key Challenges Facing the Microfinance Sector

Warning Signs of Financial Distress

  1. Escalating Loan Defaults
    • Non-performing assets (NPAs) have risen sharply in small finance banks, reflecting underlying risks.
    • Early delinquencies and reduced collection efficiency highlight increasing stress levels.
  2. Growing Borrower Debt
    • Credit card debt and predatory lending practices have worsened borrower indebtedness.
    • Regulatory actions on NBFC-MFIs point to gaps in borrower evaluation and loan pricing.

Underlying Factors

  1. Internal Operational Issues
    • Aggressive lending without assessing repayment capacity.
    • Declining accountability in the Joint Liability Group (JLG) model.
    • High staff turnover and fraudulent practices.
  2. External Influences
    • Socio-political events like debt-waiver movements and natural calamities impact repayment rates.
    • Economic pressures in rural and semi-urban areas further limit borrowers’ capacity.

Regulatory and Institutional Measures

Regulatory Steps

  • RBI has introduced stricter norms for unsecured loans and curbed practices like loan netting.
  • Institutions are required to adopt better risk management frameworks.

Organizational Changes

  • Lenders are revising credit evaluation practices and focusing on strengthening recovery mechanisms.
  • Growth projections for the sector have been tempered, with asset under management (AUM) growth slowing to 17–19% in FY25.

Resilience and Future Directions

Sectoral Strengths

  • Despite challenges, microfinance has weathered shocks like demonetisation and the COVID-19 pandemic.
  • Strong investor confidence underscores its enduring importance in financial inclusion.

Strategic Priorities

  1. Emphasizing Stability: Adopting sustainable lending and risk mitigation strategies.
  2. Leveraging Technology: Utilizing digital platforms for enhanced transparency and efficiency.
  3. Collaborative Solutions: Strengthening partnerships among regulatory bodies, MFIs, and borrowers.

Conclusion

Microfinance has been instrumental in promoting socio-economic development in India. While challenges persist, regulatory reforms, sustainable practices, and technological advancements can enable the sector to continue serving as a cornerstone of financial inclusion.

 

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