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Microfinance plays a key role in promoting financial inclusion.
Its major contribution is in making available credit to the unreached segments of society, in a hassle-free manner, that too without collaterals. The total number of households serviced by the microfinance sector, which include SHG Bank linkage and Joint Liability Groups (JLG), through various financial channels including microfinance institutions (MFIs), is more than 15 crore and the loan outstanding against them is more than ₹5-lakh crore, today.
As key players in the financial inclusion agenda, MFIs are made partners for government flagship programmes such as Pradhan Mantri Mudra Yojana or PMSVANidhi.
But the growth in microfinance sector, especially through the JLG mode, which is the dominant player with more than ₹3.25-lakh crore, is skewed. The undivided Andhra Pradesh was the laboratory where the concept of MFIs was developed and tested. Thus, the initial growth was within this State. When a major crisis erupted in 2010 in the microfinance sector, most of the portfolio was in AP State. But thereafter the sector started growing to other geographies mainly the four southern States and thereafter in the Eastern region.
Today, MFIs are operating in all States and Union Territories, but their spread is not uniform. Whereas, SHG Bank linkage, since been adopted as poverty reduction programme by the government and became a channel of rural development departments for implementing National Rural Livelihood Mission, has a coverage in most parts of the country.
Skewed spread
Unfortunately, the growth of MFIs is concentrated in 10-12 States. The data for 2021-22 shows that 82 per cent of the portfolio of microfinance sector is concentrated in 10 States and may be 100 districts. Five States — Bihar, Tamil Nadu, West Bengal, Uttar Pradesh and Karnataka account for 56 per cent of JLG portfolio.
The prevailing credit culture in a State is an important factor in the growth of MFIs. MFIs’ growth initially in the southern States and later in the Eastern States is a pointer to that.
The second reason could be the overall infrastructural support system available in a region. The easy connectivity, both physical and virtual, helps in the sector’s growth. The third reason could be the empowerment of women, especially among poor. An enabling environment for their active role makes the sector move easily into such geographies, as the sector operates with women as their borrowers.
How do we expand the microfinance sector in regions that needs it most? The first requirement is to have a conducive environment in the States for MFIs to operate freely and here the government must play an important role in creating this environment.
Two, there should be fiscal incentives for microfinance activities in less developed geographies like aspirational districts or hilly tracts.
Third is to spread financial literacy in these regions so that the borrowers are made aware of the proper utilisation of the loans and timely repayment.
Fourth, there is a need to bring awareness among the various stakeholders like District administration including law enforcing agencies about the activities of MFIs. Fifth, support for enabling facilities in these regions for easy movement, internet connectivity etc is required.
These enabling factors can help the microfinance sector to expand in new geographies and benefit millions of underserved people.
The writer is ED & CEO, Sa-Dhan
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