Economy & Business

    Microfinance Grows By Nearly 10 Times In 10 Years To Cross Rs 5L-Crore Mark

    Inam Ansari
    June6/ 2023
    Last Updated:

    Microfinance Grows

    New Delhi: Microfinance in India has a long history. Since the turn of this century, it has been expanding rapidly as a viable financial services business because of the influx of Microfinance NBFCs, growth of the self-help groups (SHG) business by Public Sector Banks, and under the NRLM (National Rural Livelihood Mission).

    It witnessed the introduction of the Small Finance Banks and major private sector banks playing an increasing role in this segment. The industry has had its ups and downs due to external shocks, but has proven to be resilient. It has evolved into one among the fastest growing and most profitable segments of the lending business, creating a positive impact on the lives of a large number of families served by the financial sector.

    As on March 2023, the microfinance gross loan portfolio was more than Rs 5 lakh crore serving over 13 crore borrowers, compared with a portfolio of Rs 51,773 crore and approximately 7 crore borrowers in March 2012. The borrower base multiplied by 2X; the portfolio by 10X since 2012. The fast-growing 'Individual Loan' portfolio is not included in these numbers because of the absence of a reliable industry source. Organised microfinance in the country officially dates back to 1974. This was when Ela R. Bhat set up the Self-Employed Women Association (SEWA) in Ahmedabad to provide banking services and individual loans to self-employed poor women of the unorganised sector. SEWA was operating as a cooperative bank. The concept of 'Self-Help Groups' (SHG) was established by Aloysius Prakash Fernandez at MYRADA, in collaboration with Canara Bank, in the 1980s.

    The loans were given to customer groups instead of individuals. These groups collected savings and distributed loans to their members. This model was widely adopted by Public Sector Banks and NGOs, including SEWA. In 1996, Vijay Mahajan established BASIX in Hyderabad, as an NBFC, to undertake microfinance as a viable business. This largely followed the Grameen Bank's 'Joint Liability System' model, where loans were given to individuals, with the groups held liable. A slew of NBFCs were established in the early 2000s, especially in Andhra Pradesh, which followed this model.

    Over-exuberance led to an explosive growth of microfinance in Andhra Pradesh, which resulted in the first major crisis, and led to a direct conflict between Andhra-based microfinance institutions and the state government, which was also pursuing a government-led micro-finance programme funded by the World Bank.

    The reasons behind this crisis were three-fold:

    -- Over-lending based on inadequate data

    -- Lack of regulations of the microfinance industry

    -- Private equity firms pushing the microfinance institutions to follow the spectacular growth of the telecom industry in India.

    This followed a period of regulated growth of the microfinance sector. The first to take the leap was the largest microfinance lender, Bandhan. They began their journey as an NGO in 2001, became a NBFC in 2009, and converted into a universal bank in 2015.

    The next major transformation was soon to follow in 2015, when RBI announced the provisional licences for ten Small Finance Banks (SFBs), eight of them being leading microfinance NBFCs. The purpose was to provide basic financial services for the vast sections of the economy not served by existing banks.

    The second major crisis to follow was in November 2016 when demonetisation was announced. At this time, the SFBs were in the process of transforming into banks. Unlike the previous crisis, which was restricted to Andhra Pradesh, this one affected operations across the country, as microfinance customers operated in a predominantly cash-based economy. As the microfinance sector recovered and started to grow, the next major crisis to hit it was the devastating Covid pandemic in 2020-21. This tested the resilience of the industry, as it became a national concern over a prolonged period. The nature of the pandemic brought field work to a grinding halt. Today, the microfinance industry has a strong Pan-India presence and has expanded from rural India to cover semi-urban as well as urban India.

    From Microfinance to Microbanking

    With a modest beginning to providing small-ticket loans to borrowers with limited means, to achieving a bigger objective of financial inclusion in the country, the industry has evolved in advancing into a full-fledged banking service.

    From SHG/JLG group loan asset products to individual loans for matured customers, the offerings of the industry expanded to secured loans such as micro-LAP for housing (Rs 3-10 lakh); micro business loans (up to Rs 3 lakh); agricultural and allied loans, two-wheeler loans, gold loans, savings and fixed deposits, insurance (life, health, and general), along with addressing payment needs (QR code and UPI-based bank payments).

    Banks have expanded their financial products to meet the full range of financial needs of the aspiring customer base. This implies that customers now have multiple relationship points with their financial service provider (banks), leading to increased stickiness in the relationships. With these changes, microfinance has transformed to microbanking. It also moved from purely women-centric customer base to a gender-agnostic relationship with the household.

    The beauty of India's pyramid is that it is moving more towards a diamond structure. As per reports on domestic household income data, the low-income group (less than Rs 1.25 lakh) is rapidly moving up towards the Rs 1.25 lakh to Rs 5 lakh bracket.

    These aspiring middle-class families ('Aspirers') are growing their income and evolving in all aspects. In this process, they are creating demand for multiple financial products and services to bring about an impa-ctful financial inclusion.

    These aspirants are no longer a weak economic section that depends on a single source of income. The families have two or more income sources, which creates a big change. This reduces their vulnerability to external shocks on one income stream, such as poor monsoon or floods, or loss of job, or even the demise of a family member. In terms of loan repayments, the microfinance segment has been one of the better-performing asset classes.

    Though the repayments were affected during major black swan events like the Andhra crisis, demonetisation, and the Covid pandemic, the borrowers were resilient enough to repay their dues and return to the borrowing cycle and grow their livelihoods. Post-Covid crisis, the microbanking business was the first to revive, and the customers who had overdue payments started repaying the loans.—IANS