In a significant meeting led by Mr. M Nagaraju, the Secretary of the Department of Financial Services (DFS), and attended by top officials, the major players in the microfinance sector alongside self-regulatory organisations (SROs) gathered to deliberate on the challenges faced by the sector. The assembly aimed to identify the support needed to foster the growth of microfinance institutions (MFIs). Sa-Dhan, an SRO approved by the Reserve Bank of India (RBI) and an advocate for microfinance and impact finance associations, tabled several recommendations aimed at boosting credit supply within the sector.

During the meeting, Sa-Dhan, represented by its Executive Director and CEO, Mr. Jiji Mammen, highlighted the urgent need for interventions to address the stumbling blocks the microfinance sector has recently encountered. The discussion revealed that a significant portion of the sector, about 2% of MFI CEOs, engaged directly with DFS officials, expressing their concerns and suggesting solutions.

One of the pivotal recommendations made by Sa-Dhan and its members involves establishing a Special Fund to support the capital needs of MFIs, especially the small and mid-sized ones. As of March 31, 2024, the microfinance sector reported a combined loan outstanding of ₹4,42,700 crore, with a vast majority of the loans extended to rural areas of India, which are typically underserved by traditional banking systems. This fund, akin to the India Micro-Finance Equity Fund (IMEF), would provide equity support to MFIs, enabling them to reach and serve areas neglected by mainstream lenders.

Additionally, Sa-Dhan proposed the creation of a dedicated funding mechanism to assist MFIs in expanding their operations into new territories and increasing credit supply. This initiative is crucial as MFIs predominantly serve regions where conventional banking services are either unavailable or unused by the impoverished population. The proposition also includes the establishment of a credit guarantee scheme to facilitate MFIs’ access to credit from banks and financial institutions, making loans more affordable for the sector.

To enhance the reach and effectiveness of MFIs, especially in areas with moderate to low penetration, Sa-Dhan suggested the formation of a Transformation Fund. This fund would focus on capacity building for NGOs and development institutions, enabling them to become MFIs or financial intermediaries. Such a fund would address the limited coverage area of MFIs, which is currently concentrated in about 200 districts across five states, contributing to 56% of the industry’s portfolio.

A special fund for the North-Eastern States was also recommended, acknowledging the unique challenges faced by the region in accessing banking facilities. Microfinance has the potential to make a significant impact in these remote areas by providing financial services to impoverished households. Additionally, the proposal includes measures to support states like Manipur, where economic disruptions have severely affected borrowers’ ability to repay loans and MFIs’ capacity to service their debts. The government could consider infusing fresh equity through long-term, interest-free loans or establishing a dedicated fund at NEDFI to aid in the recovery and further development of the microfinance ecosystem in the state.

In conclusion, these recommendations, if implemented, could substantially enhance the microfinance sector’s ability to serve the underserved populations of India, thereby fostering inclusive financial growth and stability.