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

Thursday, February 12, 2015

The Reserve Bank of India’s decision to create small finance banks could be a game-changer for microfinance institutions (MFIs) in the country.

Among the 72 applicants vying for small finance bank licence, 17 are MFIs, going by the list released by the RBI.

A small bank can do all that a large bank does but with a limitation. At least, 50 per cent of its credit portfolio should constitute loans and advances of less than ?25 lakh. Apart from big players such as SKS Microfinance, the only listed entity in the field, others who have applied for the licence include Equitas Holding (Chennai), Ujjivan Financial Services (Bengaluru), Janalakshmi Financial Services (Bengaluru), Jagaran Microfin Pvt Ltd (Kolkata), and Light Microfinance (New Delhi).

“The MFI applicants are varied in term of size and operations, and from across the country. For the microfinance industry, this has been an aspirational issue and they are keen on becoming small banks,” said M Alok Prasad, Chief Executive Officer, MFIN (Microfinance Institutions Network), the apex body for registered NBFC-MFIs in the country.

The industry, in a way, is now well-positioned for a makeover. The MFIs and their lenders have overcome the the 2010 Andhra Pradesh crisis and the State regulation that wiped out over nearly ?6,000 crore assets of micro-lenders.

Today, the industry is in better shape than ever before. The aggregate gross loan portfolio of MFIs had grown 47 per cent to ?28,800 crore in the second quarter ended September 30, 2014, compared to the year-ago period.

MFIN data show that over 27.9 million clients were provided micro credit during the quarter, a 23 per cent increase over the year-ago period. Funding to MFIs also grew 172 per cent. It is expected that by the end of the current financial year, the loan portfolio of MFIs would touch an all-time high.