Micro Finance in India - Emerging Challenges

ABSTRACT

For promoting financial inclusion in India, both banks and Non-Banking Finance Companies - Micro Finance Institutions (NBFC-MFIs) play a pivotal role by providing microfinance to individuals and tiny enterprises. There are 187 lending institutions in India engaged in providing microfinance of more than Rs.2.27 lakh crore. Today, microfinance activity is more technology driven to ensure adequate, timely and hassle free financial services. During the Covid-19 pandemic, the sector suffered significantly due to lack of demand for credit and increasing loan defaults. Hence, RBI announced certain measures including debt restructuring to provide relief for stressed micro loan customers and creating more liquidity in the market. Post the pandemic, there are enough business opportunities for the microfinance sector to prosper. However, the age old issues such as lack of due diligence in lending, over-indebtedness and multiple borrowing by customers and unethical recovery practices need to be addressed. Therefore, there is a need to make microfinance activity more digital, promote financial literacy, strengthen risk management systems, upgrade skills of the field level staff and formulate an effective grievance redressal system. Towards this end, the article attempts to review the performance of the microfinance sector at a time when India is currently celebrating the 75th year of Independence and offer suggestions to strengthen the microfinance sector in the country.