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MFIs flag rural borrower distress to RBI

Context:

The pandemic’s second wave is affecting rural households far more than 2020, with a large number of microfinance staffers, borrowers and their families hit by COVID-19, impacting many more livelihoods than during the first wave.

The trend, which poses a higher risk of loan delinquencies if the rising infections don’t taper off by the end of May along with mobility restrictions, was flagged by microfinance institutions (MFIs) to the Reserve Bank of India Governor.

Relevance:

GS-III: Indian Economy (Growth and Development of Indian Economy, Banking Sector)

Dimensions of the Article:

  1. What are Micro Finance Institutions (MFIs)?
  2. Microfinance in India
  3. Micro Finance Associated Challenges
  4. RBIs flagging of MFI distress signal

What are Micro Finance Institutions (MFIs)?

  • Micro finance Institutions, also known as MFIs, a microfinance institution is an organisation that offers financial services to low-income populations.
  • Usually, their area of operations of extending small loans are rural areas and among low-income people in urban areas.
  • MFIs provide the much-needed aid to the economically underprivileged who would have otherwise been at the mercy of the local moneylender and high interest rates.
  • The model had its genesis as a poverty alleviation tool, focused on economic and social upliftment of the marginalised sections through lending of small amounts of money without any collateral to women for income-generating activities.
  • Some of the MFIs, that qualify certain criteria and are non-deposit taking entities, come under RBI wings for Non-Banking Financial Company (NBFC) Regulation and supervision. These “Last Mile Financiers” are known as NBFC MFI.
  • The objective of covering them under RBI was to make these NBFC MFIs healthy and accountable.

History of Microfinance

  • The term “microfinancing” was first used in the 1970s during the development of Grameen Bank of Bangladesh, which was founded by the microfinance pioneer, Muhammad Yunus.
  • Since, in the developing countries, a large number of people still depends largely on subsistence farming or basic food trade for their livelihood, therefore, smallholder agriculture in these developing countries has been supported by the significant resources.

Microfinance in India

  • SEWA Cooperative Bank was initiated in 1974 in Ahmedabad, Gujarat, by Ela Bhatt which is now one of the first modern-day microfinance institutions of the country.
  • The National Bank for Agriculture and Rural Development (NABARD) offered financial services to the unbanked people, especially women and later decided to experiment with a very different model, which is now popularly known as Self-help Groups (SHGs).
  • The SHG-Bank linkage programme in India has savings accounts with 7.9 million SHGs and involves the participation of regional rural banks (RRBs), commercial banks and cooperative banks in its operations. The origin of SHGs in India can be traced back to the establishment of the Self-Employed Women’s Association (SEWA) in 1972.
  • In 2013, a loan of $144 million was provided by Grameen Capital India to the microfinance groups. Apart from the Grameen Bank, another microfinance organization named Equitas was developed in Tamil Nadu. The Southern and Western states of India are the ones attracting the greatest number of microfinance loans.

Micro Finance Associated Challenges

  1. Inadequate Data: While overall loan accounts have been increasing the actual impact of these loans on the poverty-level of clients is sketchy as data on the relative poverty-level improvement of MFI clients is fragmented.
  2. Impact of COVID-19: It has impacted the MFI sector, with collections having taken an initial hit and disbursals yet to observe any meaningful thrust.
  3. Social Objective Overlooked: In their quest for growth and profitability, the social objective of MFIs—to bring in improvement in the lives of the marginalized sections of the society—seems to have been gradually eroding.
  4. Loans for Conspicuous Consumption: The proportion of loans utilized for non-income generating purposes could be much higher than what is stipulated by RBI. These loans are short-tenured and given the economic profile of the customers, it is likely that they soon find themselves in the vicious debt trap of having to take another loan to pay off the first.

RBIs flagging of MFI distress signal

  • Urging the RBI to grant forbearance for borrowers unable to pay instalments with some flexibility for the MFIs to restructure affected loans, industry representatives observed that while collections had been normal till early April 2021 (in the wake of the gradual recovery) they had slowed down since then.
  • A larger proportion of borrowers and their families are affected by the illness, even in rural areas, in contrast to 2020.
  • The official said that a significant section of MFI staff working with borrowers had also been infected, triggering fear among employees.
  • RBI said that the Governor had discussed the current economic situation and the outlook on potential stress on MFIs’ balance sheets, as well as credit flows to their borrowers.
  • ICRA cautioned that MFIs face a ‘high risk’ perception amid the sharp surge in infections. Though some States have classified the industry as an essential activity, borrowers’ cash flows may be affected due to restrictions.

-Source: The Hindu

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September 2022
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