Microfinance Growth and Evolution:
- The microfinance sector started in the mid-1990s with SHGs linked to banks and specialized microfinance institutions (MFIs) to provide credit to poor households.
- Currently serves 12-14 crore households with an outstanding loan of about ₹7 lakh crore.
- The sector recorded almost 50% growth in the last two years.
Relevance : GS 3(Economic Development )
Challenges Faced by Microfinance:
- In 2007, borrower stress in Andhra Pradesh and Karnataka led to collection issues and over-leverage, affecting the sector’s stability.
- In 2010, Andhra Pradesh imposed restrictions on MFIs, severely impacting the sector. The Supreme Court overturned these restrictions in 2023.
- Other disruptions included demonetization (2016), GST implementation, and the IL&FS–DHFL financial crises.
- The COVID pandemic was the most significant challenge, but the sector showed resilience by adopting innovations in practices and policies.
Post-COVID Recovery and Regulatory Changes:
- Post-COVID, the sector experienced increased credit demand and a more favorable lending environment, supported by a new regulatory framework.
- Adoption of practices like credit bureaus for microfinance, fund transfers via bank accounts, and digital documentation helped stabilize the sector.
Current Stress and Household Liabilities:
- The sector faces stress due to pent-up credit demand and an increase in the number of players, leading to an oversupply of credit.
- The Reserve Bank of India’sregulatoryframework focuses on household income and liability assessments, but challenges exist due to:
- Difficulty in assessing household income due to lack of documentary proof.
- Delayed or incomplete data uploads affecting liability assessments.
Need for Data Reforms:
- Lack of accurate assessment of household income and liabilities must be addressed.
- Proposes amendments to credit bureau rules to include all institutional lenders, with more frequent data uploads (weekly or more).
- Suggests mandating Aadhaar as a common identification for KYC to streamline credit underwriting and avoid data duplication.
Conclusion:
- Reforms in data management, including real-time data uploads and uniform KYC processes, are crucial to improving credit assessment and stability in the microfinance sector.
