The microfinance industry is expected to end this fiscal year with a growth rate of about 25 per cent, aided by the sustained positive momentum in the industry.

In FY23, the microfinance sector recorded 21 per cent growth with a total outstanding of ₹3.52-lakh crore as of March 31, 2023.

“As per the information available to us, the industry is doing similar to FY23’s performance. But we may see a slightly higher growth of about 25 per cent in this fiscal. The total outstanding is expected to cross ₹4.25-lakh crore in FY24,” Jiji Mammen, Executive Director & CEO, Sa-Dhan, an association of microfinance institutions, told businessline.

Expanding reach

He said there are efforts to spread the financial inclusion exercise through the microfinance sector to several unreached areas in the country. Currently, the majority of lending is concentrated in a few areas. About 82-84 per cent of the microfinance portfolio is concentrated only in 10 States. Also, about 56 per cent of the portfolio is accounted for by the top 5 States: Bihar, Tamil Nadu, Uttar Pradesh, West Bengal, and Karnataka. But these states account for about 35-40 per cent of the total population of the country.

“There could be some other reasons, too. The kind of deprivation and poverty seen in Bihar, West Bengal, and Eastern Uttar Pradesh may not be there in some of the western States. However, we have been seriously debating on how to expand the reach to more areas,” he said.

Currently, 200 districts in the country account for 70 per cent of the microfinance portfolio, though the microfinance sector is reported to have reached more than 700 districts in the country.

“With the help of SIDBI, we have commissioned a study that will look into the factors or challenges that prevent companies from penetrating deeper into several districts of the country. For this study, we have identified about 130 districts where credit penetration is lower,” said Mammen.

While there are challenges in going to hilly terrain, there are areas where there could be law and order issues. We also learned that areas that are located near State borders are not being seriously considered for expansion due to migration issues. These are some of the initial indications we have, though the study is yet to be completed. We have also requested the RBI work out a mechanism to reach out to these areas, he added.

Sa-Dhan has mooted the idea of developing smaller institutions in those areas where the mainstream MFI players may find it difficult to reach.

“Some of the current small finance banks originally started their operations as NGOs and later became lending institutions. In early 2000, SIDBI had a programme to support some of the NGOs to transform themselves into MFIs. SIDBI supported those NGOs by way of capacity building, infusion of capital, and other measures,” he explained.

A similar model could be attempted to develop local institutions in areas where MFI penetration has not been reached. “We are in touch with NABARD and SIDBI on this. We also had a meeting with the Union Ministry of Finance regarding this,” said Mammen.