Growth of Microfinance in India

In India, microfinance is a crucial tool for supporting low-income families and providing efficient financial services like small loans. This economic approach promotes financial inclusion, lifts households out of poverty, and enhances their income and living standards. Microfinance stands as a beacon of hope, offering consistent and legitimate financial support to the marginalised sections and fostering social and economic growth. 

Recent Growth Revival of the Microfinance Sector: A Deep-dive

In the last 12-15 months, Indian MFI stocks witnessing a commendable run. The microfinance sector reached ₹3,51,521 Crores in FY23, a significant jump from the previous fiscal year's ₹2,89,845 Crores. The growth was widespread across all microfinance parties, where all institutions achieved double-digit growth excluding regular banks. 

NBFCs noted a remarkable 49% growth, which was 37% for NBFC MFIs. Not-For-Profits (NFPs) and Small Finance Banks (SVBs) demonstrated substantial growth, registering 25% and 19%, respectively. In contrast, banks recorded a modest 3% growth in their portfolios for the year. Total disbursement by all lenders in FY23 amounted to ₹3,19,948 Crores, a robust 26% growth compared to the previous fiscal year. Among lenders, NBFC MFIs led with disbursements at ₹1,24,063 Crores, followed by banks at ₹1,16,402 Crores during FY22-23. 

Year-on-year, NBFCs exhibited the highest growth in disbursements at 59%, followed by NBFC MFIs at 48%, SFBs at 18%, and NFPs at 18%. The number of loan accounts in the microfinance industry increased to 1,363 lakhs in FY23. NBFCs experienced the highest YoY growth at 23%, followed by NBFC-MFIs at 15%, NFPs at 6%, banks at 6%, and SFBs at 5%. Overall, this shows that key metrics of the microfinance sector have returned to pre-Covid levels. 

Regulatory changes that allow risk-based pricing have levelled the playing field for NBFC MFIs with banks. This reflects in their market share, which stood at 38% in December 2022 compared to 31% in FY21. With stabilising growth rates and a positive outlook, MFIs are set to sustain a growth trajectory of 20-25% in the coming times. 

History and Development of Microfinance in India: A Timeline

Microfinance's roots in India can be traced back to 1974 when SEWA Bank, with the Self-Employed Women's Association (SEWA), initiated the concept in Gujarat. Since then, it has been pivotal in extending financial services to individuals on society's periphery who were excluded from the mainstream economy. 

The formalization of microfinance gained momentum with the establishment of entities such as SKS Microfinance, Bandhan, and the emergence of Self-Help Groups (SHGs) as effective channels for microcredit delivery. The Indian government's support, notably through schemes like Swarnajayanti Gram Swarozgar Yojana (SGSY), further bolstered these efforts. In 2010, the RBI constituted the Malegam Committee to study various concerns and issues of the microfinance sector and strengthen its regulatory framework. 

The Malegam Committee recommended various margin caps for NBFC-MFIs, ranging from 10% to 24%, based on their loan portfolios. However, a uniform 12% margin cap was established for all NBFC-MFIs in the final rules published on December 2, 2011. In 2012, the previously imposed 26% margin cap was lifted from individual borrowers to accommodate fluctuating borrowing costs and improve operational flexibility. 

This regulatory evolution coupled with macroeconomic growth led to the sector boasting an impressive 40% growth rate till recent times when it took a hit due to challenges such as the COVID-19 pandemic. However, its improving stance in a dynamic landscape reflects the resilience of microfinance, its adaptability to changing economic scenarios, and the evolving needs of the marginalised. 

Impact of Microfinance in India

Despite a few regulatory challenges and macroeconomic headwinds, the impact of microfinance has been remarkable in India – 

• Poverty Alleviation: Microfinance breaks the poverty cycle by providing credit for income-generating activities and economic mobility. 

• Women Empowerment: Many microfinance borrowers are women, empowered to actively participate in households and communities. 

• Financial Inclusion: Microfinance integrates the unbanked into the formal financial system, promoting financial inclusion. 

• Employment Generation: Microfinance funds fuel small business growth, which leads to job creation and local economic development. 

• Education and Healthcare: Improved credit access enables families to invest in education and healthcare, enhancing overall well-being. 

• Community Development: Through Self-Help Groups, microfinance fosters social cohesion and contributes to community development. 

Microfinance Service Providers in India

In India, microfinance services are mainly delivered through two approaches – 

1. Bank-Led Approach, led by the Self-Help Groups-Bank Linkage Program (SHG-BLG).
2. MFI-Led Approach, led by Microfinance Institutions (MFIs).

Microfinance services are sourced from the following – 

1. Formal Institutions: Rural banks and cooperatives
2. Semiformal Organizations: Non-governmental entities 
3. Informal Sources: Small-scale lenders and store owners
4. Institutional Microfinance: Both formal and semi-formal institutions. 

While some MFIs boast effective management and a stellar track record, others operate independently.

Role of Microfinance Institutions in India

Microfinance institutions in India play a crucial role in delivering essential banking services to low-income individuals and groups. These organizations serve as lifelines for the underprivileged in the fight against poverty. Complementing the services offered by traditional banks, microfinance institutions also provide a spectrum of financial services. 

These include insurance, savings, remittance, and offering practical non-financial support such as training, counselling, and assistance to borrowers. In essence, microfinance institutions address multifaceted needs and contribute to the holistic development of the marginalised sections of India. 

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