The upcoming interim budget must set up a dedicated fund to provide equity support to small microfinance institutions (MFIs), Sa Dhan has suggested.

Sa-Dhan is an industry association for microfinance sector and a self regulatory body approved by the Reserve Bank of India. 

The microfinance sector serves over 7 crore low-income households, touching about 30 crore lives in over 650 districts of the country.

In a pre-budget wish list submitted to Finance and Corporate Affairs Minister Nirmala Sitharaman, Sa-Dhan Executive Director and CEO Jiji Mammen has also suggested that a guarantee fund be set up for enabling smaller MFIs to avail bank loan facility.

Elaborating on the Budget expectations of the microfinance sector, Mammen said that  MFIs need growth capital to expand the reach of their services and cater to the credit needs of unreached population.

“Government needs to consider creating a special fund similar to India Micro Finance Equity Fund (IMEF) within Nabard for extending equity support to small and upcoming MFIs. An amount of ₹250 crore may be provided,” Mammen suggested.

MFIs have an outstanding of more than ₹1.5-lakh crore to over 5 crore households as on date. About 75 per cent of these clients are from rural and far flung areas. They play a major role in implementation of Pradhan Mantri Mudra Yojana (PMMY) since 2015.

Guarantee cover

Mammen highlighted that smaller MFIs —mostly those with portfolio below ₹1,000 crore find it difficult to raise debt funds from banks and financial institutions.

In order to help such MFIs avail credit for their on-lending activities, a guarantee cover would be useful, he said.

“Government should consider creating a guarantee fund for the smaller MFIs with Nabsanrakshan, the subsidiary of Nabard, which can extend guarantee cover for the borrowing of MFIs from banks and financial institutions. To start with a fund of ₹500 crore may be allocated for the purpose,” he suggested.

Transformation fund

Mammen highlighted that there are many NGOs and development institutions in most part of the country working in the development sector and financial inclusion sector. 

An effort to upgrade some of these NGOs into MFIs can be done by infusing adequate capital and providing capacity building, strengthening their management, systems, process and human resources so that they can be transformed into a MFI and play the role of a financial intermediary in some hinterlands.

“For doing so, a transformation fund can be created and transformation equity can be extended to these NGOs. The fund can be housed in Sa-Dhan or DFIs like NABARD. An amount of ₹200 crore may be allocated for the purpose,” he added.

About 70 per cent of the loan portfolio under microfinance sector is in around the top 200 districts. Hence, there is a huge area uncovered by MFIs.

One of the reasons is that there are no MFIs in these areas or the main stream MFIs find it difficult to reach these areas. It is here that NGOs can be leveraged by transforming them into MFIs, it was pointed out.