{"id":43788,"date":"2024-12-01T08:20:29","date_gmt":"2024-12-01T02:50:29","guid":{"rendered":"https:\/\/vajiramandravi.com\/current-affairs\/?p=43788"},"modified":"2025-05-06T05:42:39","modified_gmt":"2025-05-06T00:12:39","slug":"rising-stress-in-microfinance-and-small-loans-in-india","status":"publish","type":"post","link":"https:\/\/vajiramandravi.com\/current-affairs\/rising-stress-in-microfinance-and-small-loans-in-india\/","title":{"rendered":"Rising Stress in Microfinance and Small Loans in India"},"content":{"rendered":"<h2><strong>What\u2019s in today\u2019s article?<\/strong><\/h2>\n<ul>\n<li>Why in News?<\/li>\n<li>What is Microfinance?<\/li>\n<li>Microfinance in India<\/li>\n<li>Signs of Stress in the Microfinance Sector<\/li>\n<li>Factors Driving Stress in the Microfinance Sector<\/li>\n<li>Regulatory and Institutional Responses to Deal with the Stress in the Microfinance Sector<\/li>\n<li>Microfinance Sector Resilience Amid Challenges and Future Outlook<\/li>\n<li>Conclusion<\/li>\n<\/ul>\n<h2><strong>Why in News?<\/strong><\/h2>\n<ul>\n<li>The microfinance sector, small finance lenders, and unsecured personal loans in India are showing early signs of stress, primarily due to escalating borrower indebtedness.<\/li>\n<li>Key indicators reveal rising delinquencies (when the borrower fails to make payments on a loan, credit card, etc., by the due date), threatening asset quality, and profitability in these segments.<\/li>\n<\/ul>\n<h2><strong>What is Microfinance?<\/strong><\/h2>\n<ul>\n<li>Microfinance or microcredit refers to <strong>financial services extended to individuals or groups with limited access to traditional banking facilities<\/strong>.<\/li>\n<li>These services include savings accounts, checking accounts, fund transfers, micro-insurance, and microcredit.<\/li>\n<li>By fostering <strong>financial inclusion<\/strong>, microfinance aims to <strong>empower marginalised communities<\/strong>, enabling them to achieve <strong>social equity and economic self-reliance<\/strong>.<\/li>\n<li><strong>Women are the primary beneficiaries of these services<\/strong>, contributing significantly to their social and financial empowerment.<\/li>\n<\/ul>\n<h2><strong>Microfinance in India:<\/strong><\/h2>\n<ul>\n<li><strong>Evolution:<\/strong>\n<ul>\n<li><strong>SEWA <\/strong>Bank, India\u2019s first microfinance institution, was established in Gujarat in <strong>1974<\/strong>. It celebrated its 50th anniversary in 2024.<\/li>\n<li>NABARD introduced the <strong>Self-Help Group (SHG) linkage model in 1984<\/strong> to combat poverty.<\/li>\n<li><strong>In 2004, the RBI classified microfinance as a priority sector.<\/strong><\/li>\n<li>The Andhra Pradesh crisis in 2010, triggered by coercive debt recovery methods, resulted in <strong>regulatory reforms.<\/strong><\/li>\n<li>The RBI established the <strong>Malegam Committee<\/strong> (2012) to address concerns in the microfinance sector post the Andhra Pradesh crisis.<\/li>\n<li>The launch of <strong>MUDRA Bank in 2015<\/strong> facilitated credit access for small businesses, boosting the microfinance ecosystem.<\/li>\n<\/ul>\n<\/li>\n<li><strong>Microfinance business models:<\/strong>\n<ul>\n<li><strong>SHGs: <\/strong>Typically consisting of 10\u201320 members, SHGs focus on collective savings and leverage these savings to secure bank loans under NABARD\u2019s SHG-Bank Linkage Programme.<\/li>\n<li><strong>Microfinance Institutions (MFIs)<\/strong>\n<ul>\n<li>MFIs deliver financial services like credit, insurance, and remittances through Joint Liability Groups (JLGs) comprising 4\u201310 members with similar economic activities.<\/li>\n<li>They operate on structured repayment schedules and earn interest, similar to traditional banks.<\/li>\n<\/ul>\n<\/li>\n<\/ul>\n<\/li>\n<li><strong>Types of microfinance lenders:<\/strong>\n<ul>\n<li><strong>NGO-MFIs:<\/strong> Registered under the Societies Registration Act, 1860, or the Indian Trusts Act, 1880.<\/li>\n<li><strong>Co-operative societies:<\/strong> Entities like Primary Agricultural Credit Societies (PACS) providing microfinance services.<\/li>\n<li><strong>Section 8 Companies:<\/strong> Non-profits under the Companies Act, 2013, offering microfinance services.<\/li>\n<li><strong>NBFC-MFIs: <\/strong>Account for 80% of the market and are regulated by the RBI. They rely on bulk loans from banks or their resources to lend to JLGs.<\/li>\n<\/ul>\n<\/li>\n<li><strong>Current status:<\/strong>\n<ul>\n<li>The microfinance sector has grown significantly, with <strong>168 MFIs serving over 3 crore clients.<\/strong><\/li>\n<li>It plays a critical role in <strong>job creation<\/strong>, contributing to 130 lakh jobs and 2% of India\u2019s Gross Value Added (GVA).<\/li>\n<li>RBI guidelines define microfinance as collateral-free loans for households with an annual income of up to \u20b93 lakh.<\/li>\n<\/ul>\n<\/li>\n<\/ul>\n<h2><strong>Signs of Stress in the Microfinance Sector:<\/strong><\/h2>\n<ul>\n<li><strong>Rising delinquencies and asset quality risks:<\/strong>\n<ul>\n<li><strong>Increased non-performing assets (NPAs):<\/strong>\n<ul>\n<li>ESAF Small Finance Bank\u2019s gross NPAs surged to \u20b91,279.3 crore (6.9% of advances) in September 2024 from \u20b9399.1 crore (2.6%) a year ago.<\/li>\n<li>CRISIL estimates SFB NPAs to rise to 2.9% by FY25 from 2.3% in FY24.<\/li>\n<\/ul>\n<\/li>\n<li><strong>Microfinance challenges: <\/strong>Early-stage delinquencies rose sharply, and collection efficiency dropped to 94% in Q2 FY25, down from 98% in the previous fiscal.<\/li>\n<\/ul>\n<\/li>\n<li><strong>Challenges with borrower indebtedness:<\/strong>\n<ul>\n<li>Credit card outstanding increased to \u20b92.71 lakh crore in September 2024 from \u20b92.30 lakh crore the previous year.<\/li>\n<li>RBI imposed restrictions on NBFC-MFIs due to predatory pricing and inadequate borrower evaluation, reflecting regulatory intervention to curb growing risks.<\/li>\n<\/ul>\n<\/li>\n<\/ul>\n<h2><strong>Factors Driving Stress in the Microfinance Sector:<\/strong><\/h2>\n<ul>\n<li><strong>Operational and structural issues:<\/strong>\n<ul>\n<li><strong>Over-leveraged borrowers: <\/strong>Aggressive lending practices have led to sanctioning loans without adequate repayment capacity.<\/li>\n<li><strong>Weak JLG model:<\/strong> Declining attendance and accountability among borrowers exacerbate defaults.<\/li>\n<li><strong>High staff attrition and fraud: <\/strong>Operational disruptions caused by staff turnover and fraudulent practices hinder recovery efforts.<\/li>\n<\/ul>\n<\/li>\n<li><strong>External challenges<\/strong>\n<ul>\n<li>Socio-political risks, <strong>such as debt-waiver campaigns and general elections<\/strong>, along with natural disasters, further strain borrower repayment capabilities.<\/li>\n<li><strong>Economic stress<\/strong> in rural and semi-urban areas continues to limit the repayment capacity of small borrowers.<\/li>\n<\/ul>\n<\/li>\n<\/ul>\n<h2><strong>Regulatory and Institutional Responses to Deal with the Stress in the Microfinance Sector:<\/strong><\/h2>\n<ul>\n<li><strong>Regulatory actions:<\/strong>\n<ul>\n<li>The RBI has issued a &#8220;<strong>cease and desist order<\/strong>&#8221; to some NBFC-MFIs to address issues such as loan netting and lending to ineligible borrowers.<\/li>\n<li>It has also <strong>tightened lending norms for unsecured loans<\/strong> and urged institutions to adopt sustainable risk management frameworks.<\/li>\n<\/ul>\n<\/li>\n<li><strong>Institutional adjustments:<\/strong>\n<ul>\n<li>Banks and NBFCs are re-evaluating their underwriting standards and focusing on <strong>risk mitigation.<\/strong><\/li>\n<li>The sector is witnessing a slowdown in growth, with MFIs\u2019 assets under management (AUM) expected to drop to 17\u201319% in FY25 from 29% in FY24.<\/li>\n<\/ul>\n<\/li>\n<\/ul>\n<h2><strong>Sector Resilience Amid Challenges and Future Outlook:<\/strong><\/h2>\n<ul>\n<li><strong>Strengths of the microfinance sector:<\/strong>\n<ul>\n<li>Despite vulnerabilities, the sector has <strong>historically shown resilience, overcoming shocks like demonetisation and the pandemic.<\/strong><\/li>\n<li><strong>Investor confidence remains strong<\/strong>, underscoring the sector&#8217;s critical role in financial inclusion.<\/li>\n<\/ul>\n<\/li>\n<li><strong>Future outlook:<\/strong>\n<ul>\n<li>Analysts predict <strong>continued stress in FY25,<\/strong> with delinquencies rising across unsecured and microfinance loans.<\/li>\n<li><strong>A cautious approach in fresh sanctions<\/strong> and stronger recovery efforts are essential for stabilising the sector.<\/li>\n<li><strong>Regulatory oversight and institutional adaptability<\/strong> will be key to navigating these challenges.<\/li>\n<\/ul>\n<\/li>\n<\/ul>\n<h2><strong>Conclusion:\u00a0<\/strong><\/h2>\n<ul>\n<li>With strategic reforms, risk management, and regulatory support, the sector can overcome the current stress and continue serving underserved communities effectively.<\/li>\n<\/ul>\n<figure class=\"media\">\n<div data-oembed-url=\"https:\/\/www.youtube.com\/watch?v=v4NnNl5i_7M\">\n<div><iframe src=\"https:\/\/www.youtube.com\/embed\/v4NnNl5i_7M\" frameborder=\"0\" allowfullscreen=\"allowfullscreen\"><\/iframe><\/div>\n<\/div>\n<\/figure>\n<hr \/>\n<h3><strong>Q.1. What is the Lakhpati Didi scheme?<\/strong><\/h3>\n<p>The Lakhpati Didi scheme is a Ministry of Rural Development initiative, which enhances access to credit, encourages entrepreneurship, and promotes financial inclusion among women Self Help Groups (SHGs) and individual entrepreneurs across the country.<\/p>\n<h3><strong>Q.2. What are Small Finance Banks (SFB)?<\/strong><\/h3>\n<p>SFBs are financial institutions that offer basic banking services to underserved and unbanked areas in India. They are similar to commercial banks, but on a smaller scale. They are governed by the RBI and are registered as public limited companies under the Companies Act, 2013.<\/p>\n<p><strong>Source: <\/strong><a href=\"https:\/\/indianexpress.com\/article\/business\/small-micro-loans-stress-small-finance-lenders-9699392\/\" target=\"_blank\" rel=\"nofollow noopener\"><u>As small and micro loans come under pressure, stress on small finance lenders could dent consumption further<\/u><\/a><\/p>\n","protected":false},"excerpt":{"rendered":"<p>The microfinance sector, small finance lenders, and unsecured personal loans in India are showing early signs of stress, primarily due to escalating borrower indebtedness<\/p>\n","protected":false},"author":5,"featured_media":43789,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"footnotes":""},"categories":[18],"tags":[],"class_list":{"0":"post-43788","1":"post","2":"type-post","3":"status-publish","4":"format-standard","5":"has-post-thumbnail","7":"category-upsc-mains-current-affairs","8":"no-featured-image-padding"},"acf":[],"_links":{"self":[{"href":"https:\/\/vajiramandravi.com\/current-affairs\/wp-json\/wp\/v2\/posts\/43788","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/vajiramandravi.com\/current-affairs\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/vajiramandravi.com\/current-affairs\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/vajiramandravi.com\/current-affairs\/wp-json\/wp\/v2\/users\/5"}],"replies":[{"embeddable":true,"href":"https:\/\/vajiramandravi.com\/current-affairs\/wp-json\/wp\/v2\/comments?post=43788"}],"version-history":[{"count":0,"href":"https:\/\/vajiramandravi.com\/current-affairs\/wp-json\/wp\/v2\/posts\/43788\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/vajiramandravi.com\/current-affairs\/wp-json\/wp\/v2\/media\/43789"}],"wp:attachment":[{"href":"https:\/\/vajiramandravi.com\/current-affairs\/wp-json\/wp\/v2\/media?parent=43788"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/vajiramandravi.com\/current-affairs\/wp-json\/wp\/v2\/categories?post=43788"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/vajiramandravi.com\/current-affairs\/wp-json\/wp\/v2\/tags?post=43788"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}