On Wednesday, the Secretary of the Department of Financial Services, M. Nagaraju, warned Microfinance Institutions (MFIs) about the risks of “reckless lending” to Self-Help Groups (SHGs). Speaking at the National Conference on Inclusive Growth in New Delhi, organized by Sa-Dhan, Nagaraju emphasized the importance of responsible lending to protect the stability of the microfinance sector.
Concern Over Growing Stress in MFI Sector
Nagaraju highlighted the potential stress in the MFI portfolio, cautioning against lenient underwriting standards when lending to SHGs. “We should be careful about what we lend, when we lend, and how we lend,” he said. He pointed out that many beneficiaries of MFI loans have limited financial literacy and exposure, making responsible lending critical to the sector’s sustainability.
Rapid Growth and Success of Microfinance Sector
Despite these concerns, Nagaraju praised the microfinance sector’s significant growth, noting that it has transformed the financial landscape in rural areas. The sector’s total outstanding loan portfolio has reached ₹7 lakh crore through the SHG Bank Linkage Programme and the JLG Financing Model.
Nagaraju expressed confidence in MFIs’ ability to help achieve the Prime Minister’s vision of “Viksit Bharat” and encouraged MFIs to take a leading role in inclusive growth.
Call for Sustainable Practices Amid Climate Risks
Acknowledging the impact of climate-related events on India, Nagaraju urged MFIs to adopt sustainable practices. He called for an inclusive development model that considers climate risks and disaster preparedness, emphasizing that sustainable development is essential at both individual and institutional levels.
Promoting Expansion and Technological Advancement in MFIs
Nagaraju also stressed the need for MFIs to extend services to underserved areas and encouraged the growth of not-for-profit MFIs. To keep up with digital trends, he suggested that larger MFIs develop their own mobile apps, noting that the cost of app development is now more affordable.
NABARD and SIDBI Address Financial Challenges in MFI Sector
NABARD Chairman K.V. Shaji also spoke at the conference, addressing the stress in the MFI portfolio and the need to boost household incomes among microfinance borrowers. Shaji encouraged MFIs to focus on income generation, not just credit distribution, and suggested closely monitoring household incomes to ensure financial stability.
SIDBI Chairman and Managing Director Manoj Mittal noted that MFI lending rates average around 24%, which he said is high given recent reductions in the Reserve Bank of India’s repo rate. Mittal called for a reduction in lending rates to make microfinance more accessible and sustainable.
Release of Bharat Microfinance Report
During the event, Nagaraju released the “Bharat Microfinance Report,” prepared by Sa-Dhan. This report provides insights into the sector’s performance and highlights policy recommendations to strengthen the microfinance ecosystem in India.
