India's microfinance sector is facing stress due to rising borrower debt, leading to increased defaults in the first half of FY25. Factors contributing include over-leveraged borrowers, high attrition rates, and operational issues. The Reserve Bank of India has intervened to manage defaults, with CRISIL predicting an increase in NPAs for small financing institutions.
Copyright infringement not intended
Picture Courtesy: https://indianexpress.com/article/business/small-micro-loans-stress-small-finance-lenders-9699392/
Stress in India's microfinance institutions, small finance lenders, and unsecured personal loans are emerging, driven mainly by rising borrower debt.
The early signs of stress are mainly caused by increasing borrower debt. This has led to an increase in defaults in the first half of FY25, with many analysts predicting that the trend will continue, affecting loan asset quality. Small and micro-loans, in particular, face significant challenges to growth and profitability.
Microfinance, often known as microcredit, is the provision of financial services to individuals or groups who have limited access to traditional banking facilities.
Savings accounts, checking accounts, cash transfers, micro-insurance, and microcredit are among the services offered to promote financial inclusion and empower underprivileged populations to achieve economic self-reliance and social fairness.
|
Small Finance Lenders |
A Small Finance Lender provides credit. However, the loan amounts are lower than those issued by commercial banks. |
Unsecured Personal Loans |
Secured loans are supported by an asset, such as a home or automobile, as collateral. These loans have lower interest rates, larger borrowing limits, longer repayment periods, and a longer processing time. Unsecured loans are those that are not secured by any collateral, for example, credit cards, student loans, and personal loans. Lenders take on higher risk with this type of lending because there is no asset to reclaim if the borrower defaults. This is why interest rates are high in this case. |
Microfinance in India started in 1974 with the founding of the SEWA Bank in Gujarat, the country's first microfinance institution.
In 1984, NABARD established the Self-Help Group (SHG) integrating the concept to address poverty, which became an important part of India's microfinance strategy.
In 2004, the Reserve Bank of India (RBI) designated microfinance as a priority sector, providing additional attention and resources to its expansion.
The Malegam Committee was formed in 2012 to resolve issues in the microfinance sector. It recommended measures for more regulation and ethical behaviour in the microfinance business.
The establishment of MUDRA Bank in 2015 helped small businesses gain access to credit, therefore strengthening India's microfinance ecosystem.
Current Status of Microfinance SectorThe microfinance sector in India has expanded tremendously, with 168 MFIs serving more than 3 crore customers. It aids in job generation, supporting 130 lakh jobs and accounting for 2% of India's Gross Value Added. According to CRIF Highmark, the Microfinance sector's portfolio outstanding increased by 26.8% in FY 2023-24, reaching Rs 442.7k crore in March 2024 In FY 2023-24, personal loans made up 29% of retail microfinance, up from 19% in FY 2022-23. Property loans had a 2.4% rate, an increase from last year's 1.6%. Property loans increased the fastest, by 41.4 %. Personal loans increased by 38.3%. |
Several factors are contributing to the increase in defaults, including lending to over-leveraged borrowers, high attrition rates among field staff, and operational issues such as elections and severe weather.
Fraudulent practices, such as lending to consumers with duplicate/fake voter IDs, credit delays, defaults, credit variances, interest rates, and mismanagement, have harmed client relationships and loan collection operations, making it more difficult for MFIs to manage their portfolios and maintain financial stability.
The rise in borrower indebtedness is causing a decline in portfolio quality, particularly in microfinance and small finance loans.
The expansion of microfinance loans and unsecured personal loans becomes restricted since borrowers are unable to repay their debts due to insufficient income. This is resulting in increased defaults and greater risk for these institutions.
The increase in NPAs is putting significant pressure on financial institutions. For example, ESAF Small Finance Bank reported a substantial rise in NPAs, rising from Rs 399.1 crore to Rs 1,279.3 crore in just a year. This triggered its stock price to drop greatly.
The rise in NPAs has raised concern among microfinance institutions, small finance banks, and unsecured loan lenders, as it indicates a potential decline in profitability and overall stability.
The RBI has intervened to manage the rising defaults, mainly in the personal loan market, by imposing additional limitations, which has resulted in a decrease in the overall personal loan growth rate, from 18% in September 2023 to 5% by September 2024.
The RBI has also issued a 'stop and desist order' against some NBFC-MFIs due to concerns about unfair pricing, inappropriate income evaluation, and unethical lending practices.
The RBI has warned non-banking institutions against pursuing fast growth without proper risk management frameworks. Financial institutions are also encouraged to tighten lending standards to reduce potential losses.
CRISIL, a credit rating agency, predicted an increase in NPAs for small financing institutions, projecting them to reach 2.9% by the end of fiscal year 25. Microfinance institutions are also likely to see a slowdown in asset growth. These developing risks are projected to hinder the sector's overall growth and earnings.
The microfinance sector has previously proven its resilience by emerging from crises such as Covid-19 and demonetisation. While it faces challenges, it continues to play an essential role in promoting financial inclusion, mainly among vulnerable people.
Must Read Articles:
Microfinance Institutions (MFIS)
Source:
|
PRACTICE QUESTION Q.Discuss the role of microfinance institutions (MFIs) in promoting financial inclusion in India. (250 words) |
© 2024 iasgyan. All right reserved
