The microfinance movement has been evolving over time in India. Starting off in the mid-1990s with the linkage of self-help groups (SHG) with banks and parallelly through specialised microfinance institutions, the objective was to extend credit to poor households. Both programmes aimed at financial inclusion of the poor, most of whom were outside the formal banking system, through a group approach. Today, they collectively serve 12-14 crore households, with an outstanding of about ₹7 lakh crore, of which about ₹4 lakh crore is contributed through joint liability group (JLG) lending.
It was, however, not a smooth ride for microfinance institutions (MFI), which encountered various challenges at different points of time. In 2007, for instance, Krishna district in Andhra Pradesh (AP) and Kolar district in Karnataka reported borrower stress on account of over-leverage and collection issues. This snowballed until, in 2010, the AP government imposed restrictions on microfinance activities through an ordinance, which was subsequently overturned by the Supreme Court in 2023.
Since the bulk of the overall portfolio of around ₹12,000 crore was then in AP, the sector suffered severely. The Malegam Committee report and the consequent regulatory framework put microfinance back on rails with more discipline and responsible lending.
Hiccups and revivals
In 2016, the demonetisation of high-value currencies put liquidity constraints on repayment. Similarly, fund flow to MFIs was disrupted during GST implementation and the financial crises at IL&FS and DHFL.
The mother of all challenges was the Covid pandemic, when the sector suffered badly.
However, after each such challenge the sector has bounced back with flying colours, adopting innovations in practices and policies. These include the introduction of a credit bureau for microfinance, transfer of funds through bank accounts of borrowers, and digital collections and documentations.
Post Covid, the microfinance sector got a new lease of life in the form of increased credit demand and improved lending environment under a new regulatory framework. Thus, in the last two years, the sector has recorded almost 50 per cent growth in portfolio and loan accounts.
Household liability
Currently, the sector is again facing some stress due to various reasons. First, due to the pent-up demand for lending and borrowing post covid, lenders and borrowers went in for more credit. At the same time the number of players, both regulated and unregulated, increased, which eased credit supply.
In fact, the Reserve Bank of India’s new regulatory framework rests mainly on two pillars — assessment of household income; and assessment of household liability. Household income assessment proved difficult due to lack of documentary proof. Similarly, lack of real-time credit liability information, on account of delayed or missed uploading of data in the Central Information Commission (mainly by non-regulated entities), hindered accurate liability assessment. Some have taken undue advantage of these challenges.
Since the microfinance sector plays a key role in the financial inclusion of poorer segments of society, including those living in hinterlands, it is important to sustain the movement. Otherwise, those in need may end up borrowing from moneylenders at usurious rates. Microfinance helps bridge the credit gap of those left out of formal banking. That is why nearly 50 per cent of Indian households are dependent on microfinance loans.
Use of Aadhaar
The lack of credible assessment of household income and liability must be addressed effectively. Household income assessment is in need of a standard model, which is being worked out by Sa-Dhan. But how do we capture household liabilities fully?
In order to bring the data of all institutional lenders on one platform, credit bureau rules may need to be amended. Currently only RBI-regulated entities are eligible to upload such information. Further, the periodicity of upload is fortnightly, which may be reduced to weekly, if not less.
Another crucial requirement is to mandate a common identification for ‘know your customer’ verification, across lenders, to avert duplication of data. Many MFIs are currently unable to use the Aadhaar as ID and, instead, rely on other documents like voter card or ration card. Mandating Aadhaar ID will go a long way in effective credit underwriting of borrowers by arriving at the correct credit liability. Hopefully these will be the positive outcome of the current ‘crisis’.
(The writer is Executive Director and CEO of Sa-Dhan)