DFS Secretary warns MFIs on reckless lending to SHGs, cites risk to sector stability
The Department of Financial Services (Finance Ministry) Secretary M. Nagaraju on Wednesday sounded a note of caution to Microfinance Institutions (MFIs) against “reckless lending” to Self Help Groups (SHGs), emphasising that such practices could jeopardize the stability of the microfinance sector.
“We need to be careful on the stress building in the MFI portfolio. Any Reckless underwriting norms while lending to SHGs will only harm the sector. We should be careful on what we lend, when we lend and how we lend”, Nagaraju said in his inaugural address at Sa-dhan organised National Conference on Inclusive Growth in the capital.
He noted that the financial literacy of the beneficiaries of MFI loans is limited and their exposure to outside world is also limited. “We should not capitalise on that. Anything that we do to impact or affect their capacity to repay back will actually harm MFIs”, Nagaraju added.
His remarks are significant as the total outstanding portfolio of Microfinance loans —both under SHG Bank linkage programme and the JLG Financing Model—currently stands at ₹ 7 lakh crore.
Growth of Microfinance sector
At the same time, Nagaraju also lauded the growth of the Microfinance sector, noting that this sector’s journey has been transformative and largely been “credible” ”.
Nagaraju highlighted that MFIs are close to the grassroots level and are best placed to drive Prime Minister’s vision of Viksit Bharat. “I hope you will play leading role in that”, he told the MFIs.
Highlighting Sa-dhan’s role in supporting MFIs and its recognition as a SRO by the RBI, Nagaraju expressed optimism that it will continue to develop essential policies to strengthen the ecosystem for MFI growth in the country.
Noting that India has been affected by several climate related events, Nagaraju said that MFIs need to build inclusive development model taking into account both climate change risk as well as disaster events. “Practising sustainable development is very important both at individual level and also institutional level”, he said.
Nagaraju also underscored the need to Promote not-for-profit MFIs and encourage MFIs to expand to under serviced areas.
On leveraging technology, Nagaraju suggested that large MFIs must build their own apps . “With so much ecosystem in the country, developing an App does not cost much”, he added.
On the occasion, he also released Sa-dhan prepared ‘Bharat Microfinance Report’.
In his address, NABARD Chairman K V Shaji noted that stress is building in the MFI portfolio. He stressed the need to look at improving the incomes of Microfinance borrowing households. “You should concentrate on not only pushing credit, but also increasing income of such households. There is need to closely track income of the households. Take a hard look at portfolio. Larger banks have started to take haircuts on smaller loans”, Shaji said.
Revamping
NABARD is revamping its Microfinance operations and policy and working with Sadhan on this front, he added.
SIDBI Chairman and Managing Director Manoj Mittal noted that weighted average lending rate of MFIs stood at 24 per cent and there is a need to bring down the lending rates. This is especially required when RBI’s repo rate has seen a reduction in recent years from the earlier 8 percent levels, he said.