The burgeoning market of microfinance in India

12 January 2020 4 min. read
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Microfinance portfolios in India have grown at a compound annual growth rate of 48% over the last half a decade, driven by favourable policy changes and increased involvement from various financial institutions. This is according to recent analysis by Big Four accounting and advisory firm KPMG. 

Microfinance in India is more than just an economic tool, often representing the empowerment of historically marginalised and financially dependent communities. KPMG contextualises the evolution of India’s microfinance sector, starting with the government’s decision to boost the sector back in 1992.

To break financial shackles, marginalised groups in rural areas traditionally formed self-help groups, where resources were pooled and distributed to those in need. The government made the decision to link these groups to banks and other financial institutions, a scheme that was developed by the National Bank for Agriculture and Rural Development.

The burgeoning market of microfinance in India

Under the scheme, small, easy-access loans are provided to segments that are conventionally deemed ineligible for credit. This was seen as a desirable alternative to other financing means such as the spread of commercial banks to rural areas and the simplification of lending procedures for rural financial institutions. 

Since 1992, KPMG reports that the sectors growth has been tremendous. “This industry has evolved over the last two decades and reached over 25% penetration level in the total addressable market in 2019,“ said the report. In their modern form, the self-help group collaboration with banking institutions have come to be known as Joint Liability Groups (JLGs).

The biggest target group involved in the world of microfinance is women in rural areas, who are otherwise oppressed. The firm reports that a staggering 99% of the beneficiaries of microfinance are women in India. This has helped bring financial inclusion to millions of rural families.

The burgeoning market of microfinance in India

Microfinance in this regard has proven an important tool for achieving something that several public and private agencies alike have been attempting for a number of years now – bringing women into the financial arena. Reports have suggested that India’s economy could benefit significantly from better inclusion, and many have been involved in promoting this scenario.

Global management consultancy Accenture, for instance, set up a learning centre for rural girls in 2016, equipped with state-of-the-art educational facilities. In February last year, Big Four accounting and advisory firm Deloitte launched the WorldClass programme, aimed at training as many as 10 million women in India over the next decade.

Microfinance appears to be serving a crucial purpose in the Indian economy, which has been driven by a variety of actors. The Reserve Bank of India has kept a watchful eye on the sector, with the intention of protecting borrowers and lenders alike, given the high levels of financial risk involved.

The burgeoning market of microfinance in India

On the financial side, the biggest source of credit are the Microfinance Institutions attached to non-banking financial corporations (NBFC-MFIs). Given their increasingly central economic role, NBFCs across India are being urged to modernise their operations, to help cope with burgeoning demand.

NBFCs without attached MFIs are the second largest lenders, followed by banking corporations and small finance banks. KPMG reports that a number of NBFC-MFIs are currently undergoing a transition to small finance banks, which might alter the dynamics in the sector.