Microfinance Industry Witnesses Double-Growth Primarily Because of NBFCs

April 2, 2023
Updated on

The Microfinance sector is significant to the Indian economy with all its forward and backward linkages and its potential to create jobs. While the overall contribution of the entire financial sector in India is about 5.5% in 2018–19, it adds roughly 2% to the country's gross value added (GVA), a productivity measure for the Indian economy.

Growth and Improvements of the Loan portfolio

The microfinance industry has shown signs of recovery during the fourth quarter of 2021-2022 after the pandemic. Around 13 percent portfolio growth among lenders from the previous quarter and around 5 percent year-on-year (YoY) growth, indicates field activities coming back to near normalcy, according to a report by the Reserve Bank of India (RBI)-recognised self-regulatory organisation (SRO) for microfinance institutions (MFIs) Sa-Dhan.

The Gross Loan Portfolio

According to a survey, the gross loan portfolio of Non-Banking Finance Companies-Microfinance Institutions (NBFC-MFIs) is predicted to increase by 10-15% in the current financial year due to an anticipated increase in disbursements.

Non-banking financial companies (NBFC)-MFIs witnessed a growth of 19% to Rs 94,096 crore in their portfolio, while not-for-profit MFIs (NFPs) reported a growth of 30% to Rs 2,745 crore during the fourth quarter compared to the previous quarter. The banks' portfolio, however, has decreased 7% to Rs. 1.02 lakh crore.

Portfolio At Risk

However, the domestic rating agency Brickwork Ratings stated in a report that the Portfolio At Risk (PAR) of NBFC-MFIs may nudge up to 5.5-6 percent this fiscal from 5.40 percent in the previous financial year. The  Gross Loan Portfolio (GLP) for NBFC-MFIs' has grown only 11% year-over-year growth in FY 2021.

The GLP for NBFC-MFIs in FY22 is anticipated to resume its growth and register around 10-15% growth because of the pick-up in disbursements brought on by the expected recovery in economic activity, restarting of expansion plans that were put on hold due to the pandemic, and increased need for credit among low-income segments.

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RBI Announcement on Increasing the Flow of Credit to MSME Borrowers

The recent RBI announcements to enhance the flow of credit to MSME borrowers and permit small financing banks to treat loans given to MFIs for subsequent lending as Priority Sector Lending (PSL) will spur growth in credit by MFIs.

PAR levels for the MFI industry increased dramatically in FY21 due to the lockdown in the first half of the year. The lockdown had a significant impact on asset quality since their collections were severely hampered since transactions with microfinance customers are cash-intensive and necessitate field trips. Another research stated that, owing to concerns surrounding the pandemic scenario in the country, PAR levels are expected to stay elevated at around 5.5–6% in FY2022.

Even though the sector is having a long journey to reclaim its old glory, the timely invention by the Government and RBIin various matters regarding policies and financial packages have benefited the industry to a great extent.

Consistent Growth of NBFC-MFIs

The non-banking financial firms (NBFCs), small finance banks, or NBFC-MFIs have experienced constant growth over the past year, but banks in the microfinance industry have struggled. Bank portfolios have shrunk by 7%, but NBFC-MFIs and not-for-profit MFIs (NFPs) have witnessed notable increases of 19% and 30%, respectively.

The total amount of loans disbursed by banks between Q4 of FY 2020-21 and Q4 of FY 2021-22 decreased by around 23%. In the last quarter of FY 2020–21, banks disbursed a total loan amount of Rs. 35,775 crores, down from Rs. 46,911 crores in the previous quarter. This is an indication that the livelihood of microfinance beneficiaries is slowly getting back on track with resuming of their work operations. According to another research, the recovery is not the same across all the states and union territories, but overall collection efficiency increased to 95-99 percent.


When compared to the prior fiscal year, microfinance loan disbursals in 2021–2022 climbed dramatically to Rs 2,39,433 crore. The number of loans disbursed rose last year from 5.2 crores in 2020–21 to 6.3 crore, demonstrating the ongoing expansion of the microfinance portfolio.

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