Key facts
- India's microfinance sector is facing new credit risks.
- A weak monsoon and the West Asia conflict are identified as potential threats.
- These risks could negatively impact rural livelihoods.
- Despite these concerns, the sector has seen a revival with improved asset quality and loan disbursements.
- Loan disbursement in Q4 was the highest in eight quarters.
- The share of unpaid loans (31-180 days) fell to 2% by March.
India's microfinance sector, valued at ₹3.31 lakh crore, is confronting potential new credit risks stemming from a predicted weak monsoon and ongoing geopolitical tensions in West Asia. The Microfinance Industry Network (MFIN) has alerted industry players to these challenges, which could adversely affect the livelihoods of rural populations.
Despite these emerging threats, the sector has demonstrated a significant recovery. Data for the quarter ending March showed loan disbursements reaching ₹77,524 crore, the highest in the past eight quarters. Asset quality has also improved, with the proportion of loans unpaid for 31 to 180 days decreasing to 2% from 6.3% a year prior.
The India Meteorological Department (IMD) has forecast below-normal rainfall between June and September, attributing it to the onset of El Nino conditions. This aligns with historical patterns linking El Nino to weaker monsoons in India. The Reserve Bank of India has also voiced concerns that reduced rainfall and geopolitical conflicts could contribute to higher inflation through supply chain disruptions.
MFIN's CEO, Alok Misra, expressed optimism that a ₹20,000-crore credit guarantee scheme, announced in March, will further bolster the sector's recovery by improving bank funding for non-banking financial companies-microfinance institutions. The government has extended the deadline for this scheme to August 31, aiming to increase its utilization. Misra urged banks to actively support financial inclusion initiatives.