MFIs need a course correction

Microfinance institutions (MFIs) are critical for facilitating credit access and thereby income generation for some of the economically weakest sections in India.

- DEEP N MUKHERJEE ABHINAV BANSAL

Microfinance institutions (MFIs) are critical for facilitating credit access and thereby income generation for some of the economically weakest sections in India. For two decades, they have been fulfilling their mission while expanding their footprint. Pre-2022, there were periods when delinquency spiked in MFI portfolios, triggered by exogenous shocks. These shocks, such as a sharp economic downturn, Covid-19, or local political issues, exposed the MFI portfolio to systemic risks. The portfolios bounced back to health once the exogenous shocks subsided. However, the gradual deterioration of MFI portfolios from 2022 till date is different. There are no external shocks. Arguably, it was specific risks driven by borrowers who ended up having or being given more debt than they can pay back. The current deterioration in MFI portfolio could be primarily attributed to a lapse in risk management practices on the part of at least some entities.

As collection efforts by MFIs intensified, sociopolitical interferences crept in over debt collections. But these political moves were not the trigger of the current MFI stress. In the run-up to the current situation, the Reserve Bank of India (RBI) has also raised concerns about the underwriting practices and risk appetite of MFIs. Despite pockets of excellence, if the typical MFI lender does not improve risk management capability, the portfolio quality is unlikely to improve.