Since the 1990s, micro-lenders have rendered yeoman service by providing poor households easy access to collateral-free credit. Through Joint Liability Groups formed in villages, loans are disbursed and repayments collected at borrowers’ doorsteps, supporting livelihood and consumption needs with minimal paperwork.
However, disruptions caused by Covid-19, rising inflation and climate-related issues have affected loan recovery and borrower behaviour. Self-Regulatory Organisations (SRO) like Sa-Dhan initiated corrective measures to curb over-leveraging, yet many small and mid-sized MFIs continue to struggle due to liquidity constraints. MFIs play a vital role in government programmes such as (Mudra Yojana) and (PMSVANidhi), contributing nearly 40 per cent of Shishu loans. Given that over 90 per cent of MSMEs are micro and nano enterprises, micro-finance is crucial to sustaining them and achieving India’s Viksit Bharat 2047 vision. Gov-ernment support to the sector is, therefore, essential.
- MFIs rely heavily on debt funding from financial institutions, but lenders hesitate, es-pecially for smaller MFIs. A government-backed credit guarantee mechanism can build confidence and ensure uninterrupted fund flow to the sector.
- Equity is vital for MFI growth, yet few institutions provide it. With limited impact and PE investors now, the government should revive an IMEF-like fund with SIDBI.
- Recent sector stress arose from over-lending and over-borrowing. Responsible borrowing must match responsible lending. Supporting SRO-led financial literacy programmes is essential to educate microfinance borrowers.
- Microfinance sector also suffers due to false promises and misleading campaigns/ announcements of loans waiver etc. A law which prohibits such campaigns will be helpful.
- Climate change severely impacts vulnerable communities. Supporting climate-resilient microfinance is essential. The government should create a dedicated fund to educate communities and enable MFIs to lend and support long-term sustainability.
The author is the ED &CEO of Sa-Dhan, a SRO for MFIs.
