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Indian microfinance has traversed a long and arduous path since its inception in the 1970s. Initially conceived as a way to alleviate poverty and empower women, microfinance has expanded significantly over the past five decades. Presently, the sector plays a critical role in extending financial services to the unbanked and under-banked, particularly in rural areas.
With a loan portfolio worth more than INR4.2 lakh crore as of September 2024 and a customer base consisting of roughly 8 crore unique borrowers, the journey of microfinance in India consists of multiple milestones encompassing the institution of several microfinance institutions (MFIs) and the introduction of favourable government regulations. This article examines the role of the corporatisation of India’s microfinance sector in its growth and evolution.
Corporatisation
Over the years, the Indian microfinance space has evolved to include different players like Small Finance Banks (SFBs), Non-Banking Financial Corporation-Microfinance Institutions (NBFC-MFIs), banks, and not-for-profit MFIs. Apart from the non-profits, the rest of these actors are all regulated by the Reserve Bank of India (RBI). On the other hand, most non-profits are registered as trusts or societies and are, therefore, regulated by the corresponding laws. This variety points to an organised and corporatised approach to microfinance.
The Indian microfinance space has evolved to include different players like Small Finance Banks (SFBs), Non-Banking Financial Corporation-Microfinance Institutions (NBFC-MFIs), banks, and not-for-profit MFIs.
The RBI has periodically enforced certain regulations to simplify microfinance operations and guarantee customer protection. The 2010 microfinance crisis in Andhra Pradesh led the RBI to institute the Malegam Committee to scrutinise issues and concerns in the microfinance sector. The committee’s recommendations led to the creation of a comprehensive regulatory framework for NBFC-MFIs, including interest rate caps, margin caps, and guidelines on fair practices.
In 2014, the RBI recognised the Microfinance Institutions Network (MFIN) and Sa-Dhan as Self-Regulatory Organisations (SROs), which play a crucial role in ensuring regulatory compliance and promoting best practices. More recently in 2022, the RBI introduced harmonised regulations for all regulated entities (REs) involved in microfinance, aimed to create a level-playing field, address issues of over-indebtedness, and ensure transparent pricing and fair practices. The RBI has also pushed for data localisation, caps on multiple lending, and maintenance of public credit registries.
The adoption of new technologies has proved transformational. Digital platforms have decreased operating expenses and turnaround times, making microfinance more efficient and scalable. For instance, MFIs are now able to process loan applications, disbursements, and repayments online, reducing the requirement for physical branches and enhancing the reach of services to remote regions. Mobile phones have also emerged as critical instruments of financial inclusion. Using mobile banking and payment applications, MFIs can reach customers in rural and underserved areas, enabling simpler and faster transactions.
The RBI introduced harmonised regulations for all regulated entities (REs) involved in microfinance, aimed to create a level-playing field, address issues of over-indebtedness, and ensure transparent pricing and fair practices.
Finally, government programmes have also significantly boosted India’s microfinance sector. A major contribution of government initiatives has been to direct credit extension to underserved segments through priority sector lending, Micro Units Development and Refinance Agency (MUDRA) Yojana, loan co-origination and private investments. To supplement these, measures are being implemented to empower women by extending credit to them on easier terms, supporting them in establishing businesses and involving them in financial literacy programmes. Initiatives such as Pradhan Mantri Mahila Shakti Kendra are anticipated to create a supportive environment for women to realise their complete potential.
Benefits
The benefits of the aforementioned facets of corporatisation of the Indian microfinance landscape have been broad-ranging.
- Capital: Corporatisation has enabled MFIs to source more funding, allowing them to broaden their reach and serve more customers;
- Efficiency and professionalism: With corporatisation, MFIs have embraced more professional management practices and novel technologies, enhancing operational efficiency and streamlining service delivery;
- Regulation: The mainstreaming of the microfinance sector has necessitated more stringent regulatory superintendence, encouraging improved governance and safety for clients;
- Financial inclusion: Corporatisation has provided a major boost to financial inclusion by improving the provision of financial services like loans, savings, and insurance to underserved sections of the population; and
- Economic growth: By boosting financial inclusion, corporatisation of microfinance has contributed to economic growth by supporting small businesses and entrepreneurs.
Despite these virtues, concerns have also stemmed from the increasing commercialisation of microfinance.
Criticism
A significant concern with the corporatisation of microfinance is the problem of borrower indebtedness. With the growth of MFIs and heightened competition, there has been a propensity to promote more credit to clients, often without sufficient due diligence in respect of the borrower’s creditworthiness. This has caused over-indebtedness—debtors taking on more loans than they can repay, sometimes leading to acute financial strain and enforced austerity in their everyday lives. Further, with increased commercialisation, MFIs often attempt to enhance loan sizes to more profitable clients, frequently at the expense of poorer clients.
With the growth of MFIs and heightened competition, there has been a propensity to promote more credit to clients, often without sufficient due diligence in respect of the borrower’s creditworthiness.
The increased emphasis on profitability can cause MFIs to prioritise financial performance over societal impact. This shift can incentivise higher interest rates and fees, rendering credit less accessible to the very people microfinance seeks to assist. Empirical research has established that several Indian MFIs have witnessed this “mission drift”, with a significant number of MFIs growing their gross loan portfolios while lagging in terms of outreach—the number of clients served, signalling a reorientation from societal goals to financial performance. If not managed correctly, mission drift can compromise the societal aims of microfinance, causing adverse consequences for the entire sector.
Conclusion
The corporatisation of the Indian microfinance sector has, indeed, ushered in beneficial changes concerning growth and efficiency, as well as bringing professional management and financial sustainability to MFIs. However, there is a continuing debate regarding the ability of MFIs to simultaneously attain efficiency and deep penetration.
Some scholars contend that emphasising profitability unavoidably hinders the depth of penetration, thereby leading to mission drift. Thus, balancing financial objectives with societal aims remains a crucial challenge for the sector.
Aditya Bhan is a Fellow at the Observer Research Foundation.
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