The government’s ₹20,000 crore credit guarantee support for the microfinance sector, announced on 21 March, comes at a crucial time for smaller non-banking finance company-microfinance institutions (NBFC-MFIs), which are grappling with tight liquidity and risk-averse lenders.
In an interview, Sadaf Sayeed, chief executive officer of Muthoot Microfin in New Delhi, told Mint the move could unlock lending, revive financial inclusion and support sectoral growth. Edited excerpts:
How do you assess the government’s ₹20,000 crore support for the microfinance sector?
This is a very welcome step and something the industry has been requesting for a long time. The key issue we have been facing is liquidity, particularly for mid-sized and smaller NBFC-MFIs. While the larger institutions still have access to funding, smaller players have struggled because lenders have become risk averse.
The credit guarantee structure is important because it assures lenders that a large portion of their exposure is protected. This reduces their hesitation and enables them to extend credit to MFIs, which in turn can continue lending to end-borrowers. This is critical for financial inclusion, especially at a time when the sector has seen a contraction in reach, with nearly 17 million customers moving out of the system over the past year and a half.
How does this compare with the support extended during covid through Targeted Long-Term Repo Operations (TLTRO)?
The TLTRO support during covid was designed for an entirely different situation. At that time, there was an immediate liquidity crisis because collections had slowed due to moratoriums, while operational expenses continued. The Reserve Bank of India’s intervention ensured that institutions had access to short-term liquidity to survive that phase.
What we are seeing now is more of a long-term structural support. This scheme is designed to ensure sustainability and continued lending over a longer period, unlike TLTRO, which was more of a short-term liquidity infusion. Both were timely, but they addressed very different needs of the sector.
Is the size of the package sufficient?
It is a good beginning, but not enough if we look at the scale of the industry. Ideally, if the entire amount had been structured as a guarantee, it could have been leveraged multiple times to create a much larger pool of funds.
The industry disburses close to ₹70,000- ₹80,000 crore in a quarter, so this support will not fully bridge the gap. However, it will certainly help smaller NBFC-MFIs access funding and should support the sector in achieving moderate growth in the coming year.
The sector has seen credit stress in the recent past. How is the situation now?
The stress was largely due to overleveraging and some macroeconomic pressures. However, the response from the industry and self-regulatory organizations was swift. Measures such as capping the number of lenders per borrower and limiting overall exposure have brought discipline.
We are already seeing the results. The proportion of highly leveraged borrowers has declined sharply, and the quality of new portfolios is significantly better. Delinquency levels have improved and overall, the sector is now on a much more stable footing compared to last year.
How do you see competition evolving, particularly from banks and fintechs?
Interestingly, NBFC-MFIs have been gaining market share in recent times. Their share has increased, while banks have seen a relative decline in this segment. This is largely because MFIs operate at smaller ticket sizes and have deeper reach in rural areas.
As far as fintechs are concerned, they are playing more of an enabling role rather than disrupting the sector. Microfinance still requires a physical presence and an assisted model, especially in rural and semi-urban areas, which limits the extent of pure digital disruption.
What is your growth outlook for the sector and your company?
The industry went through a phase of consolidation last year, but going forward, we expect a steady recovery with around 10% growth. For us, we are targeting a higher growth trajectory of around 20% annually, with a long-term goal of reaching ₹30,000 crore in assets under management by 2030.
What are the key challenges that still need attention?
One of the biggest challenges is local-level disruption, whether due to political or social factors, which can affect collection activities. Natural calamities are another concern, as they directly impact borrower incomes.
There is also a need for stronger regulatory clarity, particularly around unregulated lending. A well-defined legislative framework would go a long way in bringing stability and consistency across states.