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Microfinance sector posts impressive growth in 2014

The biggest measure among all was the RBI giving a bank license to Bandhan, India's largest microfinance institutions (MFIs).

twitter-logoE Kumar Sharma | December 29, 2014 | Updated 10:45 IST
Microfinance sector posts impressive growth in 2014
Photo: Reuters

Financial inclusion remained the theme song across most government policies in 2014, a year that also saw the microfinance sector recording impressive growth numbers.

At the end of August, state-run banks sweat it out in their efforts to connect with the poor to make a success out of the Prime Minister Narendra Modi's Jan Dhan programme to open bank accounts for the unbanked poor.

Many state-run banks got in aggressively in this drive and set up camps across the country with senior staff keeping an hourly tab and all at a cost. As one banker pointed out, most banks would have had to spend a minimum of  Rs 100-150 per account - think of movement of documents, commission/fee paid to business correspondents at remote locations, cost of RuPay card, setting up of camps across the country. Nationally, across banks, a total of more than two crore new accounts were opened quickly.

For the moment, as is apparent, the low balance accounts for the poor cost more to service and would only add to costs and almost nothing to the bottom line. How the landscape will change for the Indian public sector banks after the Jan Dhan push, the New Year will tell.

The Reserve Bank of India (RBI) also pitched in with measures that signaled the setting up of some new-generation institutions.

The RBI issued guidelines on creating small banks, payment banks, and microfinance institutions (MFI) as banking correspondents. Setting up small banks is aimed to incentivise MFIs to become banks for small borrowers, while creation of payment banks could lead to paradigm shift as those entities which have huge distribution network - such as mobile-phone companies and retail chains - could start mobilising deposits without getting into credit disbursements and become instruments in financial inclusion.

The biggest measure among all was the RBI giving a bank license to Bandhan, India's largest MFI.

The microfinance sector posted impressive growth in 2014. "Unlike earlier, flow of funds from banks to MFIs improved in 2014 as some banks became enthusiastic in their lending to this sector. As a result, we saw some leading MFIs growing between 30 to 50 per cent during the year," says Sanjay Sinha, Managing Director of Micro-Credit Ratings International (M-CRIL), a consultancy that conducts assessments and ratings of MFIs and provides research and advisory services.

Data from the industry body Microfinance Institutions Network (MFIN) show that, as of September 30, MFIs provided loans to over 27.9 million clients, an increase of 23 per cent over the second quarter of 2013/14.

The aggregate gross loan portfolio of MFIs (excluding non-performing portfolio) grew 47 per cent while disbursements increased by 61 per cent.

Funding to MFIs surged 172 per cent from a year earlier. Sinha, however, cautions there is need to be more vigilant in the New Year to ensure players take adequate measures so that there is no overheating in the sector.

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