MICROFINANCE DELINQUENCIES: ECONOMY

MICROFINANCE DELINQUENCIES: ECONOMY

NEWS: Microfinance delinquencies nearly double to over Rs 28,000 crore in a year

 

WHAT’S IN THE NEWS?

India’s microfinance sector is experiencing rising delinquencies due to borrower overleveraging, operational challenges, and external economic pressures. Addressing these challenges with enhanced credit discipline, regulatory measures, and financial education is vital for sustaining financial inclusion.

 

What is Microfinance?

  • Definition:
    Microfinance provides small loans and financial services to low-income groups who cannot access conventional banking channels. It is a critical tool for financial inclusion, especially for supporting entrepreneurial activities and income generation.
  • Types of Microfinance Institutions (MFIs):
  • NBFC-MFIs: Non-Banking Financial Companies focusing on microfinance.
  • NGOs: Operate as non-profit entities offering financial services.
  • Cooperatives: Member-owned organizations that provide microfinance services.
  • Commercial Banks and Small Finance Banks (SFBs): Extend microfinance loans as part of their priority sector lending mandates.

 

Current Scenario in the Microfinance Sector

  • Rising Delinquencies:
  • Increase in overdue loans (31-180 days), reflected in higher Portfolio at Risk (PAR).
  • Geographic Concentration: Bihar, Tamil Nadu, Uttar Pradesh, and Odisha contribute 62% of new late payments.
  • SFBs are the most affected segment, showing higher levels of delinquencies.
  • Growth Amid Challenges:
  • Market Share: NBFCs and banks hold 71.3% of the total microloan portfolio.
  • Year-on-Year Growth:
    • Loan book: Increased by 7.6%.
    • Live customer base: Increased by 8.9%.
  • Quarterly Decline:
      • Loan book: Reduced by 4.3%.
      • Customer base: Declined by 1.1%.
  • Evolution of the Microfinance Sector in India: The development of the microfinance sector in India occurred in four main phases: 
    • Initial Period (1974–1984): 
      • 1974: Shri Mahila Sewa Sahakari Bank was established to provide financial services to women in the unorganized sector. 
      • 1984: NABARD advocated Self Help Group (SHG) linkage as a tool for poverty alleviation. 
    • Change Period (2002–2006): 
      • 2002: Norms for unsecured lending to SHGs were aligned with other secured loans. 
      • 2004: The Reserve Bank of India (RBI) included microfinance within the priority sector, recognizing MFIs as a tool for financial inclusion. 
      • 2006: Allegations of high interest rates and unethical recovery practices led the government to shut down branches of some MFIs. 
    • Growth and Crisis (2007–2010): 
      • 2007: Private equity players entered the market, leading to rapid growth in the MFI loan book (INR 35 billion). 
      • 2009: The Microfinance Institutions Network (MFIN) was formed, allowing NBFC-MFIs to become members. 
      • 2010: The Andhra crisis unfolded, involving coercive debt collection practices that led to borrower suicides. The government issued an Ordinance, that significantly curbed MFI activities. 
    • Consolidation and Maturity (2012–2015): 
      • 2012: The Malegam Committee recommended changes, and RBI implemented new regulations. 
      • 2014: RBI issued a universal banking license to Bandhan Bank, the largest microlender. MFIN was recognized as a self-regulatory organization (SRO). 
      • 2015: The government launched MUDRA Bank to finance small businesses. 
  • Status of Microfinance in India: 
    • Microfinance contributes about 130 lakh jobs and 2% of our GVA, as per a National Council of Applied Economic Research (NCAER) study. 
    • It has the potential to reach all the 6.3 crore unincorporated and non-agricultural enterprises. The RBI recently defined microfinance as collateral-free loans given to households having annual incomes up to Rs. 3 lakh. 

 

Reasons for Rising Delinquencies

  • Borrower Overleveraging:Excessive borrowing from MFIs and non-MFI sources leads to unsustainable debt burdens.
  • Fraud and Misrepresentation:Operational risks increase due to fraudulent practices, including misreporting of borrower data.
  • Economic Distress:External shocks, such as income uncertainties or economic downturns, reduce borrowers’ repayment capacity.
  • Operational Inefficiencies:
  • High staff attrition affects loan recovery processes.
  • Inadequate borrower assessment mechanisms fail to gauge repayment abilities.

 

Impact of Rising Delinquencies

  • Financial Strain on MFIs:Increased credit costs and reduced profitability threaten financial stability.
  • Restricted Lending Capacity:Higher NPAs limit MFIs’ ability to extend fresh credit, undermining financial inclusion efforts.
  • Borrower Distress:Overleveraged borrowers face financial hardships and the risk of exclusion from formal financial systems.
  • Sector-Wide Trust Issues:Rising defaults erode investor confidence, reducing funding to the microfinance ecosystem.

 

Way Ahead

  • Strengthening Credit Assessment: Use advanced borrower profiling and risk assessment tools to improve credit quality.
  • Enhancing Financial Literacy:Conduct educational campaigns to promote responsible borrowing and credit management.
  • Stricter Regulatory Oversight:Strengthen supervision to minimize fraudulent practices and ensure operational efficiency.
  • Operational Strengthening:Reduce staff attrition through better training, compensation, and incentives.
  • Debt Consolidation Measures:Introduce structured repayment plans to ease the burden on overleveraged borrowers and prevent defaults.

Source: https://indianexpress.com/article/business/microfinance-delinquencies-nearly-double-to-over-rs-28000-crore-in-a-year-9773817/