The microfinance sector in India has gone through several ups and downs over the last three decades. These have mostly been on account of external events like demonetisation, introduction of GST, funds flow disruption owing to IL&FS crisis, the Covid pandemic, and so on. However, every time the sector has faced setbacks, it has managed to bounce-back and emerge stronger. In the last two years, the sector has recorded strong growth, and its position now is way better than it was in 2022.

The high growth in credit offtake is a welcome phenomenon, especially in our country where financial inclusion is still an unfinished agenda. Considering the clientele it serves and higher cost of intermediation, MFIs (microfinance institutions) have always been closely scrutinised. Most of theMFIs borrow from other institutions like banks, DFIs and NBFCs, which add to the cost of intermediation.

Thanks to the efforts of the regulator as well as self-regulatory bodies (SROs), the microfinance sector is much better governed and monitored now. Sa-Dhan, one of the SROs in the sector, has been playing a key role in keeping a check on the sector. In July 2024, Sa-Dhan introduced seven sankalps or additional guidelines to reduce stress in the sector.

These include not lending to households with microfinance exposure beyond ₹2 lakh while keeping the RBI prescribed 50 per cent repayment obligations, comprehensive credit bureau check at the household level, transparent pricing with individual components well defined, capping processing fee at 1.5 per cent (excluding applicable taxes), not lending to an NPA account of more than ₹3,000, proper check on utilisation of loans, mandatory employee bureau check for staff hiring, and insistence on obtaining and providing relieving letters.

In a recent review, the Sa-Dhan board observed that there has been a positive response to these guidelines by unwinding of borrower leverage by almost 10 per cent. The overall microfinance portfolio came down from ₹4.42 lakh crore in March 2024 to ₹4.04 lakh crore in October. Also, the borrower exposure of ₹2 lakh and more has come down from 2.5 per cent in March to around 0.6 per cent in September. Thus, the de-growth has also turned out to be good news.

Going forward, the sector needs to be more cautious as the number of lenders in the market has gone up significantly. Also, entities not regulated by the RBI are getting into the MFI space, thereby increasing the competition. The best way of taking the agenda of financial inclusion forward is to move into newer geographies where there is higher demand for credit. Also, there needs to be a mechanism to assess household income and liability correctly. Hopefully the sector will address these issues soon.

The writer is ED and CEO of Sa-Dhan, an SRO for MFIs