It reveals a sharp rise in loan delinquencies across microfinance sector in FY 2024–25, stressing microfinance repayment cycles, likely due to rural distress, weather shocks, limited financial literacy etc.
Microfinance Sector in India:
- Definition: Microfinance refers to banking services designed to provide financial access to low-income individuals or groups who are typically excluded from traditional banking systems.
- Significance
- Financial Inclusion: Brings marginalized populations into the formal financial system.
- Rural Penetration: High rural client proportion (71%) highlights effectiveness of micro lending institutions (MLIs) in reaching underserved rural populations.
- Empowerment of Women: Women-led SHGs have been instrumental in improving socio-economic conditions, with 88% of SHGs linked to banks being women-led.
- Challenges
- Asset Quality Deterioration: Portfolio at Risk (PAR) worsened across all buckets compared to the previous year, indicating elevated credit risks.
- State Delinquency: Bihar performed the worst, not only accounting for the highest amounts of loans outstanding, but also the highest rates of default on these loans.
- Operational and Financial Headwinds
- Staff and Client Retention Challenges: The sector is experiencing difficulties in client retention. Furthermore, MLIs are seeing a decline in their workforce.
- Rising Funding Costs: The Cost of Funds (weighted average) for the sector increased to 11.33% (small MLIs faced the highest).
- Declining Profitability: MLIs reporting Return on Equity (RoE) below 1% has increased significantly.
Long-term growth of microfinance industry is expected to hinge on improved customer underwriting, digital adoption, policy interventions and focus on responsible lending and improved collection practices.
Initiatives taken by government for strengthening microfinance
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