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

Monday, October 19, 2015

By definition, microfinance is the business of giving tiny loans to people who do not have access to formal banking services. The Investopedia website defines microfinance as a type of banking service that is provided to unemployed or low-income individuals or groups who would otherwise have no other means of gaining financial services. “…the goal of microfinance is to give-low income people an opportunity to become self-sufficient by providing a means of saving money, borrowing money and insurance,” it says. In India, microfinance institutions (MFIs) cannot collect deposits, but sell insurance products, besides offering small loans that are typically paid back in weekly or monthly instalments.

Such institutions operate in the hinterland where traditional banks balk at serving. Or, so we believed. The scene has changed. MFIs have shifted their focus from rural pockets to urban India. For the first time in its 25-year history, Indian MFIs have more urban clients than rural ones. The latest data, compiled by industry self-regulatory organization Sa-Dhan, shows 67% of the 37 million MFI customers live in urban India.

The share of rural customers was 69% in fiscal year 2012. That dropped marginally to 67% in 2013. In the following two years, the share of rural customers has declined drastically. In 2014, rural customers constituted 56% of the total. It dropped further to 33% in the following year. This busts the myth that Indian microfinance is predominantly a rural phenomenon, very different from what we see in Latin America and large parts of Africa and Asia.

The industry’s outreach to urban clients was increasing every year and it has now outstripped that of rural customers. Why has this happened? Before we look for an answer, let’s look at the broader picture. The industry had a customer base of 37.1 million in March 2015, up from 33 million a year ago. It included 6.5 million customers of Bandhan Financial Services Ltd, the largest MFI that turned into a bank in August. The percentage of women customers remained unchanged at 97%, while the share of Scheduled Caste and Scheduled Tribe customers rose from 19% to 28%. The loan portfolio was close to Rs.40,000 crore and 80% of it was for income-generating activities. The average loan per borrower in the year ended 31 March rose to Rs.13,162 fromRs.10,079 in at the end of the previous fiscal.

The quality of assets has improved. If we leave a few MFIs that had been affected by the crisis that gripped the industry following the Andhra Pradesh state law five years ago, the industry’s non-performing assets (NPAs) were to the tune of 13 basis points as on 31 March. A basis point is one-hundredth of a percentage point.