Amber Lights Flashing

Mint Road has taken a sympathetic view of microfinance institutions, but the business must refashion itself as challenges and opportunities emerge

- reports Raghu Mohan

"The microfinance sector continues to suffer from a vicious cycle of over-indebtedness, high interest rates and harsh recovery practices," said M Rajeshwar Rao, deputy governor at the Reserve Bank of India (RBI), last week. These are tough words from the otherwise soft-spoken Rao, the senior-most in that position at the central bank. He also pointed out the prevalence of Shylock-like tendencies: "Lenders should look beyond the conventional 'high-yielding business' tag...and approach it with an empathic and developmental perspective, recognising the socioeconomic role that microfinance plays in empowering vulnerable communities."

His observations came three days after the RBI's move to give a breather to microfinance institutions (MFIs) — it lowered the qualifying assets threshold to a minimum of 60 per cent of total assets (net of intangible assets) from 75 per cent. What does this mean for the trade? The earlier ratio, set in March 2022, was on total assets of MFIs rather than on net assets. This included even the cash carried by an MFI and fixed assets while calculating the ratio — it led to a much smaller space for any diversification. The change provides additional headroom of 15 per cent for venturing into other products and borrower segments apart from the legacy qualifying microfinance loans.

And what kind of diversification is on the cards in terms of asset classes?