NextBillion - An Initiative of the William Davidson Institute at the University of Michigan

Monday, April 20, 2015

The microfinance sector, which is seen as a vehicle of financial inclusion, has seen a boom over the past year as government has laid more emphasis on financial inclusion. The sector is expected to grow robustly in the next few years as large players consolidate their position in their market.

Schemes like Jan-Dhan Yojna and MUDRA Bank, which are specifically targeting those at the bottom of the pyramid, have come to define funding in the financial inclusion space. Alteration of rules by the RBI and introduction of new business models after the microfinance crisis in Andhra Pradesh have transformed MFIs into profit-making institutions while ensuring that the system works efficiently without any major glitches. The sector’s outreach increased over 23 per cent and gross loan portfolio grew 42 per cent annually in FY14.

“After the crisis, RBI has handled the sector very vigilantly, carefully and very thoughtfully. The kind of policy and intervention that it brought in to satisfy all the critics of microfinance is really commendable. It gave a framework, brought in a different setup for NBFC-MFIs and now it is regularly reviewing the quality as per the requirement and the fact that Bandhan got a banking licence and RBI came up with the small bank concept, encouraging MFIs to convert themselves, shows that RBI is serious about the sector,” said Dibyajyoti Pattnaik, director at Annapurna Microfinance Pvt. Ltd.

The profitability of the sector has declined from the phenomenal growth rates witnessed till the AP crisis. Microfinance sector is expected to grow at 24 per cent annually over FY15-19, said India Ratings and Research (Ind-Ra) in a report released on Wednesday.

Highlighting the success of MFIs post the AP crisis, the agency pointed out that the sector is growing and attracting banks and private equity (PE) investors again.

The report highlighted the steps taken by banks and the government after the AP debacle. “The growth of MFIs is sustainable in view of interest rate and margin caps, defined recovery procedures, caps on borrower indebtedness and credit check procedures,” Ind-Ra said.