Microfinance is macro

Microfinance is no more a microbusiness. It’s a macro business involving more than 70 million unique borrowers and nearly ₹4 lakh-crore loan outstanding.

The second quarter data for the year has shown that the micro credit during the quarter has grown by 25 per cent with NBFC MFIs recording around 40 per cent growth.

The recoveries have also been impressive with nearly 99 per cent recoveries being recorded. Thus, the sector has come of age and has been contributing immensely to the economy.

Gone are the days when microfinance was seen as a philanthropic activity limited to supporting the basic necessities of people.

Today microfinance sector is a major contributor to the economy.

One of the studies of NCAER indicate that the contribution of microfinance to the economy is around 2.05 per cent of GVA. The major focus of the MFIs is now to support the economic activities and enhance the income level of the people.

Microfinance will play a major role in the economy touching $5 trillion, helping creating wealth at the ‘bottom of the pyramid’ through the informal sector enterprises.

IPO success

The recent initial public issues of ESAF SFB and Muthoot Microfin, which were oversubscribed several times, show the growing confidence in microfinance sector by investors and funders.

A similar kind of response was also received by some of the MFIs who had gone to the market to raise funds through debt instruments like bonds. Realising the faith of the people, several MFIs plan to going public.

The sector has also been witnessing mergers and acquisitions.

A recent count shows there had been 20 such consolidations in the last 4-5 years. There are cases of banks taking over MFIs, not only for the purpose of expanding their priority sector portfolio but also to benefit from its business model.

Also, it has helped some of the entities to grow bigger in size and larger in their operational areas, and giving them a head start in newer geographies.

So the microfinance sector is now playing a larger role and is now an important player in the country’s economic landscape. Especially the segment which generally were outside the formal banking system is being made capable of generating more income and help in the financial wellbeing of the people.

The microfinance institutions, on other hand, have to realise their new position and have to act diligently, so that the sector continues to grow and benefit the underprivileged.

The regulator has been supportive in the growth of this sector.

The MFIs need to keep the faith reposed on them by the central bank in this regard. The Self-Regulatory Organisation like Sa-Dhan need to ensure that nobody take advantage of the situation and cause difficulties to the borrowers.

Empowering the needy

Taking account of the contributions of microfinance sector to the economy, in empowering the bottom of pyramid, the government has to support it proactively. First of all, there is still lot of misinformation about the microfinance sector, even among the government officials thereby putting pressure on the microfinance institutions.

Creating a proper understanding of MFIs will benefit the economy more. Secondly some vested elements are vitiating the recovery process and the RBI recently issued a warning against them.

The government must nip them at the bud so that the credit culture is not spoilt.

Thirdly, the government may consider a law against the promise of loan waiver for the purpose of political gains which can endanger the good repayment environment in the country. This will help strengthen the microfinance movement and help it deliver more.

The writer is Executive Director & CEO, Sa-Dhan. Views expressed are personal

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