MFI Industry's New Challenge

Sector is ready to make amends, but it needs money to remain in business. If banks don't loosen the purse strings, things will worsen

- TAMAL BANDYOPADHYAY

Until recently, India's microfinance industry faced the challenge of rising bad loans. By the time it has got a grip on the situation, another challenge, an equally daunting one, has cropped up.

A few smaller microfinance lenders are facing difficulties servicing bank loans; some may have even defaulted.

Since the industry hasn't been in the best of health, some banks, their primary lenders, have closed the money tap.

When money is in short supply, it's difficult for those non-banking financial companies (NBFCs) that operate in the microfinance segment—NBFC-MFIs—to expand their loan book since they first need to clear the debt to their lenders. Else, they cannot get fresh loans. In the process, recoveries may be affected further.

In such a situation, they depend on repayment by existing borrowers to extend fresh loans. When borrowers falter, the lenders' kitty dries up and they stare at defaults.

While NBFC-MFIs can have up to 40 per cent non-microloans on their books, NBFCs can give 25 per cent of their loans to micro-borrowers. Both sets of financial intermediaries have banks as their primary lenders.

Industry estimate indicates that in the financial year 2024-25 (FY25), NBFC-MFIs received a little over ₹57,000 crore from banks and other financial institutions for on-lending to customers. This was around 38 per cent less than FY24. For large MFIs, 82 per cent of debt funding was by the banks; medium and small MFIs received 54 per cent and 28 per cent of their funds from banks, respectively.

As of December 2024, 9,291 different kinds of NBFCs were registered with the Reserve Bank of India (RBI). Of these, 95 are MFI-NBFCs—26 classified as middle-layer intermediaries and 69, lower level. A middle-layer entity has an asset size of at least ₹1,000 crore.