IndusInd Bank Q2 results: PAT tanks 40% on higher provisions, bad loans
The Reserve Bank of India (RBI) has delivered a sharp message to Microfinance Institutions (MFIs), urging them to realign their lending practices and prioritise affordability in their credit offerings.
MFIs can no longer hide behind the facade of limited access as a rationale for steep interest rates, Jayant Kr Dash, Executive Director of the RBI asserted, challenging the very foundation of the sector’s traditional defence.
Speaking at the Sa-Dhan-organised National Conference on Financial Inclusion in capital, Dash made it clear that this “specious argument” of high-cost credit is unavoidable in the absence of access to credit had lost its relevance.
He called on MFIs to innovate and find new, sustainable ways to offer credit at affordable rates, emphasising that financial inclusion should not come at the cost of exploiting the vulnerable.
“Risk sharing through blended finance and switching to lean management techniques could hold some answers (to ensure affordable rates)”, Dash suggested.
His remarks are significant as MFIs in India on an average levy interest rate of 24 per cent per annum on borrowers.
Dash also said there is an onerous responsibility on MFIs to ensure that they are not abetting over indebtedness or participating in predatory lending.
- Also read: Regulatory measures and tighter funding conditions could result in a slowdown in credit growth: ICRA
Tightening grip
Dash noted that at an aggregate level, more than 12 per cent of total microfinance borrowers had 4 or more active loans in March 2024 with that going up to 18 per cent in some States.
The RBI’s rebuke signals a tightening grip over MFIs, which now face increasing pressure to strike a balance between business viability and social responsibility.
Meanwhile the ‘Bharat Microfinance Report’ released by Sa-dhan highlighted that a reduction of interest rates from 20 per cent per annum to 19.5 per cent per annum will not make a difference in the weekly or monthly instalment payment of the poor household.
The report said that the combined loan outstanding of India’s growing microfinance sector stood at ₹4,42,700 crore, as outstanding against 1,613 lakh loan accounts, as on March 31, 2024.
The share of different institutions in loan outstanding stood as: NBFC-MFIs: ₹1,73,504 crore (39 per cent); Banks: ₹1,46,909 crore (33 per cent); SFBs: ₹74,712 crore (17 per cent); NBFCs: ₹45,236 crore (10 per cent) and Non-profit MFIs: ₹2,338 crore (1 per cent).
The report observed that the micro-finance institutions, particularly the ‘For – Profit’ organisations like NBFC-MFIs, NBFCs and SFBs should follow more caution for ensuring a better quality of assets and growth while exploring the ways of sustainable inclusive finance.
Financial Inclusion 2.0
RBI Executive Director said that time is ripe for a vision of Financial Inclusion 2.0 for India to emerge. It is likely to be characterised by augmented impact of inclusive and all-round financial services for low-income and vulnerable persons, households or enterprises.
It needs to expand beyond just ‘breadth’ or ‘depth’ of financial inclusion and shift focus to maximising the utility of financial inclusion. “That would gradually render the term ‘financial inclusion’ remodel itself in to ‘economic inclusion’”, Dash said.
“Economic inclusion is when people, on the top of meeting their basic subsistence needs, are productive with all market opportunities, and empowered to make choices about their economic lives. Done right, the three goals of sustainability, inclusion, and growth can be a quintessential self-reinforcing triad”, Dash added.
Jiji Mammen, Executive Director and CEO of Sa-dhan said, “The micro-finance sector needs to move into a sustainable mode; so as to bring a comprehensive and sustainable development at the bottom of the pyramid.
The Bharat Microfinance Report will help in giving a new direction for the inclusive agenda by making available credit to the bottom of the pyramid.”