A noticeable increase in the contribution of microfinance institutions along with banks in the financial sector

- Growing opportunities for MFIs to grow with increased credit uptake

Looking at the latest figures, it seems that the condition of the banking sector as well as the Micro Finance Institutions (MFI) sector in the country is improving drastically. As a result of increasing credit demand in the country, the amount of credit disbursed by microfinance institutions is increasing. The amount of loans disbursed by non-banking finance companies operating as MFIs has increased by 45.80 percent year-on-year to Rs 30,398 crore in the June quarter of the current year. The relaxation of norms for microfinance institutions by the Reserve Bank has given them a level playing field to compete with banks. The role of microfinance institutions is becoming important in the credit system of the country.

In the last quarter of financial year 2023, loans of Rs 41490 crore were released by micro finance companies. The number of loan holders also increased from 51 lakh in the first quarter of last financial year to 68.90 lakh in this period of the current financial year. However, in the March quarter of the current year, this number stood at 95 lakh. In the June quarter of the current financial year, microfinance companies disbursed an average of Rs 44,114 per borrower, showing an increase of 8.30 percent.

Assets under management of MFIs, which stood at Rs 89,005 crore in the June quarter of last year, have also increased to Rs 1,26,053 crore in a year.

Due to the increase in economic activity in the country after Corona, there is a significant increase in the demand for loans by individuals and industries. Demand for credit is increasing even amid high interest rates, which is benefiting MFIs. However, the country's MFIs are worried about increasing their borrowing costs as a result of increased demand amid a strained financial environment. Rising yields, higher lending rates and higher cost of bonds are becoming expensive for NBFCs.

The situation of MFIs, which had faced a huge increase in non-performing assets (NPAs) during the Corona period, has now suddenly changed. After a slowdown in the growth of loan portfolios in FY 2021 and 2022, an increase in the loan portfolios of MFIs has been seen since April 2022. In FY 2023, the MFI loan portfolio increased by 22 percent to Rs 3.50 trillion. After a gap of two years, a large number of new borrowers turned to MFIs for financial needs in the last financial year. The number of unique (borrowers from more than one financial institution) declined to 5.80 crore in FY 2022 from 6.64 crore in the previous financial year. Looking at the pace of borrowing money from MFIs in recent times, the growth rate in the MFI sector is estimated to be 18 to 20 percent during the financial year 2023 to 2025.

Interestingly, at the end of financial year 2023, the amount of outstanding micro loans of banks was Rs 1.19 trillion, while the amount of MFIs was Rs 1.38 trillion. At the end of financial year 2022, the number of microloans of banks was Rs 1.14 trillion while that of MFIs was Rs 1 trillion.

During Corona and demonetisation, the condition of MFIs and NBFCs deteriorated. However, since April 2022, the Reserve Bank has eased lending norms for MFIs, opening up opportunities for the sector to grow. The cap on the interest rate for lending to MFIs has been abolished. MFIs are free to maintain their interest rates. After this concession, most MFIs have increased their loan rates, resulting in an increase in their margins. Before this standard was implemented, MFIs had to compete with banks.

After a long period, the performance of the country's MFI sector is looking encouraging. The proportion of NPAs or bad loans on the books has come down. As the provision for bad loans has come down, the net profit has seen an increase. MFIs do not currently have the provision to make as much provisioning as in the past, with the decline in NPAs and the low level of new NPAs arising. The main reason for the increase in net profit is the increase in net interest income.

Aggressive policy of providing credit to business and industry is welcome in any economy but the practice of providing collateralless or unsecured loans ultimately puts public money at stake. It would not be wrong to say that it is the responsibility of the managers and directors of the financial institution to see that the stability that has come is maintained and that the problem of bad loans does not arise in a new form.