NBFC-MFIs Outpace Microfinance Industry Growth, Banks Falter
Introduction
The non-banking finance companies-microfinance institutions (NBFC-MFIs) in India have shown an impressive 43% year-on-year growth, allowing them to capture a larger share of the microfinance market. Over the past year, their portfolio has increased from 35% to 41.28%. In contrast, banks have struggled, with only a slight growth of 0.86%. This article explores the reasons behind the success of NBFC-MFIs and the challenges faced by the banking sector.
Growth of NBFC-MFIs
The overall gross micro loan portfolio of NBFC-MFIs grew by 21% in the last year, reaching Rs 3.59 lakh crore ($47.8bn) by the end of June. This remarkable growth has positioned NBFC-MFIs as a dominant force in the microfinance industry. Small finance banks (SFB) and other non-banking finance companies also experienced significant growth, with their micro loan portfolios rising by 24% each.
Benefit of New Regulatory Framework
The proactive approach of NBFC-MFIs can be attributed to the new regulatory framework set by the Reserve Bank of India (RBI) and the positive sentiment towards microfinance institutions in the country. Jiji Mammen, the executive director of Sa-dhan, an industry organization, emphasized the importance of this regulatory framework in facilitating the growth of NBFC-MFIs.
Market Share Breakdown
According to a segmentation analysis, banks account for a 31.99% share of microcredit, while SFBs and NBFCs make up 17.40% and 9.06% respectively. Not-for-profit entities hold the remaining 0.27%. NBFC-MFIs have secured the highest market share in terms of portfolio since the third quarter of FY23.
Impact of Cashpor Micro Credit
The inclusion of not-for-profit lender Cashpor Micro Credit within the NBFC-MFI sector has further contributed to their success. Cashpor currently holds a portfolio worth Rs 4670 crore and intends to maintain its not-for-profit status, even after the new regulatory framework required section 8 companies with portfolios exceeding Rs 100 crore to register as NBFC-MFIs. Without including Cashpor’s data, NBFC-MFIs still achieved a significant 40.5% year-on-year growth.
Banks Face Challenges
The banking sector, on the other hand, experienced stagnant growth due to Bandhan Bank reporting a lower microfinance book of Rs 51,000 crore at the end of June, compared to Rs 57,000 crore the previous year. This decline has resulted in an 8% shrinkage of the portfolio in West Bengal, where Bandhan Bank holds an advantage.
Regional Growth Disparities
In terms of portfolio growth, certain states have outperformed the industry average. Bihar recorded a growth rate of 37%, followed by Tamil Nadu at 28%, Uttar Pradesh at 41%, Karnataka at 28%, and Rajasthan at 22%. The top five states in terms of portfolio are Bihar, Tamil Nadu, Uttar Pradesh, Karnataka, and West Bengal, making up approximately 56% of the total portfolio.
Concerns and Challenges
Despite the overall success of NBFC-MFIs, some concerns remain. Jiji Mammen expressed worry over local issues in different regions that may disrupt business operations. Additionally, there are organized efforts to mislead vulnerable individuals, which could potentially harm the credit culture in the country. Mammen emphasized the need for constant vigilance from law enforcement agencies to combat such unscrupulous elements.
Negative Growth in Northeastern States
The states in the northeastern region have experienced negative year-on-year growth in the portfolio. Assam leads the chart with a 35% decline, followed by Nagaland (-33%), Sikkim (-24%), Tripura (-19%), Manipur (-16%), and Meghalaya (-10%).
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