About 11 million microfinance borrowers out of the formal credit system – The Economic Times

Report on the Contraction of India’s Microfinance Sector and its Implications for Sustainable Development Goals

Executive Summary

A recent analysis of India’s microfinance sector reveals a significant contraction, with approximately 11 million low-income borrowers exiting the formal credit system over the past year. This trend, driven by a slowdown in lending from microfinance institutions (MFIs) facing asset-quality and funding challenges, poses a direct threat to India’s progress on several key Sustainable Development Goals (SDGs), particularly those related to poverty, economic growth, and inequality.

Key Findings and Data Analysis

Data from Crif High Mark and the Microfinance Institutions Network (MFIN) highlights a concerning decline in financial inclusion for individuals at the base of the economic pyramid.

• Borrower Base Reduction: The number of unique microfinance borrowers fell from 86 million to 75 million in the year ending September.
• Sustained Portfolio Decline: The sector has experienced its sixth consecutive quarterly fall in its overall portfolio.
• Portfolio Size: The total microfinance portfolio stood at Rs 3.46 lakh crore at the end of September, according to Crif data. MFIN reported a slightly lower figure of Rs 3.39 lakh crore.
• Data Discrepancy: MFIN is currently investigating the significant difference between its data and Crif’s, which has led to varying estimates of borrower exits.
• Improved Asset Quality: Paradoxically, the portfolio at risk (PAR 31-90 days) has improved to 1.09%, indicating disciplined underwriting practices within the sector.

Impact on Sustainable Development Goals (SDGs)

The exclusion of millions from the formal credit system represents a substantial setback for achieving the SDGs.

1. SDG 1 (No Poverty): The withdrawal of micro-credit access directly hampers poverty alleviation efforts. It restricts the ability of low-income households to invest in income-generating activities, manage financial shocks, and build a pathway out of poverty.
2. SDG 8 (Decent Work and Economic Growth): Microfinance is a critical engine for micro-entrepreneurship and grassroots economic activity. The lending slowdown stifles job creation and undermines the goal of achieving inclusive and sustainable economic growth.
3. SDG 10 (Reduced Inequalities): By pushing the most vulnerable individuals out of the formal financial system, this trend exacerbates financial exclusion and widens the gap between the financially served and underserved, directly contradicting the goal of reducing inequality.
4. SDG 5 (Gender Equality): Given that a substantial portion of microfinance clients are women, reduced access to credit disproportionately affects their economic empowerment, financial autonomy, and ability to contribute to their household and community economies.

Sectoral Challenges and Funding Dynamics

The contraction is attributed to specific challenges within the microfinance ecosystem, impacting the partnerships necessary for achieving the goals.

• Funding Squeeze: A continued funding squeeze for institutions financing the bottom-of-the-pyramid is the primary driver of the lending slowdown.
• Inequitable Fund Distribution: While debt funding for NBFC-MFIs increased by 22.5% to Rs 18,993 crore in the second quarter, reports indicate that these funds are predominantly channeled to larger MFI entities. Smaller lenders, crucial for last-mile service delivery, are not receiving adequate support, highlighting a weakness in **SDG 17 (Partnerships for the Goals)**.

Geographical Concentration

The microfinance portfolio exhibits significant regional concentration, with 83% of the gross loan portfolio held within the top 10 states. This points to regional disparities in financial inclusion efforts.

The leading states by portfolio size are:

1. Bihar
2. Tamil Nadu
3. Uttar Pradesh

1. Which SDGs are addressed or connected to the issues highlighted in the article?

SDG 1: No Poverty

• The article directly addresses the financial exclusion of “low-income borrowers” and individuals at the “base of the economic pyramid.” Microfinance is a critical tool for poverty alleviation, and the exit of 11 million such borrowers from the formal credit system represents a significant setback to efforts aimed at ending poverty.

SDG 8: Decent Work and Economic Growth

• Access to credit is fundamental for entrepreneurship and the growth of micro-enterprises, which are key drivers of local economic growth and job creation. The article highlights a “funding squeeze” and slowed lending, which hampers the ability of low-income individuals to engage in productive economic activities, thereby affecting overall economic growth.

SDG 10: Reduced Inequalities

• The article points to growing inequality in access to financial services. The exclusion of low-income populations from the formal credit system exacerbates economic disparities. Furthermore, it notes an inequality within the lending sector itself, where “a majority of the bank loans go to the big microfinance entities while the smaller ones don’t get adequate support,” which can further entrench inequalities.

2. What specific targets under those SDGs can be identified based on the article’s content?

SDG 1: No Poverty

• Target 1.4: By 2030, ensure that all men and women, in particular the poor and the vulnerable, have equal rights to economic resources, as well as access to… financial services, including microfinance.
  • The article’s central theme is the shrinking access to microfinance for “low-income borrowers.” The report that “11 million low-income borrowers have exited India’s formal credit system” directly contradicts the objective of this target.

SDG 8: Decent Work and Economic Growth

• Target 8.3: Promote development-oriented policies that support productive activities… and encourage the formalization and growth of micro-, small- and medium-sized enterprises, including through access to financial services.
  • The decline in the microfinance portfolio and the exit of borrowers indicate a reduction in the availability of financial services for micro-entrepreneurs at the base of the pyramid, undermining this target.
• Target 8.10: Strengthen the capacity of domestic financial institutions to encourage and expand access to banking, insurance and financial services for all.
  • The article shows a weakening of this capacity, as microfinance lenders are described as being “beset with asset-quality challenges” and experiencing a “funding squeeze,” leading to a “sixth consecutive quarterly fall in the microfinance portfolio.”

SDG 10: Reduced Inequalities

• Target 10.2: By 2030, empower and promote the social, economic and political inclusion of all, irrespective of… economic or other status.
  • The exclusion of millions of low-income individuals from the formal credit system is a clear example of declining economic inclusion, which this target aims to prevent.

3. Are there any indicators mentioned or implied in the article that can be used to measure progress towards the identified targets?

SDG 1 & SDG 8 Indicators

• Number of unique microfinance borrowers: The article explicitly states that the number of “unique microfinance borrowers stood at 75 million at the end of September, compared with 86 million a year ago.” This is a direct quantitative indicator of access to financial services (relevant to Targets 1.4 and 8.10).
• Size of the microfinance portfolio: The article provides figures for the total microfinance portfolio (“Rs 3.46 lakh crore” and “Rs 3.39 lakh crore”). The “sixth consecutive quarterly fall” in this portfolio is an indicator of the shrinking availability of credit for the target population.

SDG 10 Indicators

• Disparity in funding for lenders: The statement that “a majority of the bank loans go to the big microfinance entities while the smaller ones don’t get adequate support” implies an indicator of inequality within the financial sector that serves the poor.
• Geographic concentration of loan portfolio: The fact that the “Top 10 states constitute 83% in terms of gross loan portfolio” serves as an indicator of regional inequality in access to microfinance.

4. Table of SDGs, Targets, and Indicators

Source: m.economictimes.com