Microfinance firms see stronger demand  in rural  areas  than  urban

  • The central bank has allowed households earning up to 3 lakh annually to be classified as eligible for microloans, expanding the market for microfinance institutions

Gopika Gopakumar
Updated9 Jul 2022
RBI has allowed households earning up to  <span class='webrupee'>₹</span>3 lakh annually to be classified as eligible for microloans mint
RBI has allowed households earning up to ₹3 lakh annually to be classified as eligible for microloans mint

Microfinance companies are expecting greater growth in rural markets than urban, following new guidelines issued by the Reserve Bank of India in March.

The central bank has allowed households earning up to 3 lakh annually to be classified as eligible for microloans, expanding the market for microfinance institutions (MFIs). The cap earlier was 1.25 lakh in rural areas and 2 lakh in other areas. It also removed the cap on pricing loans, aiding deeper penetration into existing markets and entry into new ones.

MFIs believe these measures, along with the rising demand for loans in rural India, should drive growth for NBFC-MFIs.

“After urban, there is huge focus on rural,” said Devesh Sachdev, MD and CEO, Fusion Micro Finance. “Focus on people outside the formal financial system. The new MFI regulations will make sure other products will be offered to these customers. These regulations can improve credit culture. Credit assessment of households is very beneficial for long-term sustainability,” Sachdev said at a webinar organized by rating agency CRISIL.

According to CRISIL, the annual credit cost of NBFC-MFIs had shot up to 4-5% owing to covid-related provisioning, from 1.5-2% earlier.

With asset quality pressures gradually easing and sizeable provision buffers created, their credit cost is expected to decline to 2.5-2.8% this fiscal.

“There have been various impacts on the operational model of microfinance companies. After demonetization, credit cost has doubled. There have also been behavioural changes to customer mindset. Earlier, collection efficiency used to be more than 99%. If we are able to get 98-98.5% collection efficiency, to that extent, there will be impact on credit cost,” said Uday Kumar Hebbar, MD and CEO, CreditAccess Grameen Ltd.

MFIs are feeling the heat as top lenders like HDFC Bank set up rural banking units. That said, MFIs believe there is scope for growth, as credit share of rural India is only 10%, even as it contributes 45% of GDP.

According to data from the Microfinance Institutions Network, the gross loan portfolio of the sector in India rose by 10% to 2.85 trillion as on 31 March 2022 from 2.59 trillion a year ago.

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