The central bank has advised microfinance lenders to exercise restraint in disbursing loans in the states of Bihar and Uttar Pradesh as a precautionary measure.
Significance of Bihar and Uttar Pradesh:
Bihar and Uttar Pradesh collectively represent 25.3% of total microfinance loans, particularly serving low-income women borrowers. Since 2019, these states have witnessed rapid growth in assets under management for microfinance institutions.
Reason for Caution:
The advice to lenders to slow down loan disbursements is in response to indications of market overheating, particularly evident in the March quarter of the current year.
Borrowing Trends and Regional Growth:
A recent report by CRIF Highmark revealed that in the quarter ending March 2024, a significant percentage of borrowers in Bihar and Uttar Pradesh were availing loans from multiple lenders, signaling a potential risk of market saturation.
Concerns and Regulatory Response:
The fast growth in Bihar and Uttar Pradesh has prompted the regulatory body to take a cautious stance due to concerns about reduced opportunities for lending to creditworthy borrowers. The regulator is apprehensive of a potential crisis and is considering a calibrated approach to growth to avoid a situation similar to the microfinance crisis in Andhra Pradesh in 2010.
Industry Sensitization and Outlook:
Lenders have been made aware of a possible market bubble in Bihar by industry associations, with discussions emphasizing the need for careful growth strategies in recent meetings. It is noted that the situation is more critical in Bihar than in Uttar Pradesh, as the former is showing signs of a highly saturated market.
Conclusion:
The central bank’s cautionary advice to microfinance lenders in Bihar and Uttar Pradesh reflects its proactive approach to prevent potential market risks and ensure sustainable growth in the microfinance sector.
