Just 10 Indian states share 82% of microfinance loans, says RBI

A senior figure at the Reserve Bank of India is calling for loans to be spread more evenly, as new figures show that 82% of so-called ‘microfinance loans’ are made in just 10 states.

The RBI’s Deputy Governor, M. Rajeshwar Rao, said that while microfinance has emerged as one of the most important tools to foster financial inclusion in the country, its spread is not evenly distributed.

Speaking at a recent event on the impact of microfinance on India’s economy, Rao commented: “Hopefully, going forward, the spread could be diversified.”

The RBI’s figures show that businesses in the eastern and north-eastern regions of the country have benefitted the most from microfinance, with a 37% share. Small firms in the south received 27% of loans, while for those in the west the figure was 15%.

As at 30 June 2022, the total microfinance loan portfolio in India stood at Rs 2.93 lakh crore (£31.5bn), with banks lending the largest share at 38%. Non-banking financial company-microfinance institutions (NBFC-MFIs) were responsible for 35% of the loans. Small finance banks, other NBFCs and other entities had a combined share of 27%.

Rao was speaking at the launch of NBFC-MFIs’ association MFIN’s India Microfinance Review report on 4 November.

Together with the loans issued via the RBI’s Self Help Group (SHG)-bank linkage, the overall size of the microfinance loan portfolio is around Rs 4.82 lakh crore. The SHG-bank linkage programme focuses on helping people with lower income access financial services.


Technology is the key

Rao also advised firms in the microfinance sector to adopt the latest, cutting-edge technology, not only to improve efficiency and bring down costs, but to also mitigate risks such as fraud. It also enhance customer service and awareness, he said.

“Microfinance lenders with their high-touch models are best placed to handhold their customers for developing familiarity with technology which will enhance their awareness about the opportunities available to them,” he said. “This way, the lenders can go beyond a transactional arrangement of just meeting the credit needs of the borrower to a transformational relationship with the customers resulting in positive externalities in terms of the social benefits.”

One of the big successes in the sector is SIDBI’s 59-minute loan approval scheme for micro, small and medium enterprises (MSMEs). Called PSB Loans in 59 Minutes, the initiative has led to a 3.2% jump in loan applications approved (as of 1 November 2022), based on the previous 12-month period.

Banks sanctioned 2,43,140 loans amounting to Rs 82,962 crore as of November 1, 2022, compared with 2,35,511 loans involving Rs 78,738 crore approved as of November 1, 2021, official data showed.

In terms of loans made, the year-on-year growth stood at only 2.6% from 2,19,526 loans, amounting to Rs 64,326 crore disbursed as of 1 November 2021, to 2,25,236 loans involving Rs 67,007 crore as of 1 November 2022.

In month-on-month sanctions and disbursals, MSMEs were awarded 2,42,812 loans involving Rs 82,822 crores as of 30 September 2022, while 2,25,015 loans involving Rs 66,922 crores were disbursed.

Meanwhile, the Self Reliant India (SRI) fund, launched by the Indian government to provide growth capital to MSMEs, has committed to funding of Rs 5,000 crore in 38 private equity (PE) and venture capital (VC) firms, according to Suresh Kozhikote, Managing Director and CEO, SBICAP Ventures.

“Each fund will get an average of Rs 100-150 crore; however, its deployment will happen over time as the PE funds have an investment period of five-six years so they will apply for the SRI fund as and when they find suitable companies to invest in,” he said.

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