Context: 

The RBI had recently released its 26th Financial Stability Report (December 2022) in which the RBI remarked that the credit to the Microfinance sector has grown at a steady pace.

Highlights:

• Rise in Bad Loans: The report highlighted the building stress levels in the loans portfolio (i.e., bad loans are increasing). 
  • The share of loans overdue by more than 90 days has risen to 14% in September 2022, from 12% in March 2022.

Components of Microfinance:

• Micro credit: Extension of very small loans to borrowers who typically lack collateral, steady employment or income stream and verifiable credit history.
• Micro Insurance: Insurance with low premiums and low coverage. It covers low income/net-worth persons and transactions are of low value. It can cover a wide range of risks including damage to crops and livestock. 
• Micro Saving: Targeted people with low incomes and low savings. The limit of minimum deposit/balance is low and there are no service charges.
• Microfinance Institutions: A large number of organizations with varied size and legal forms offer Microfinance services. 

Status of Microfinance: 

• According to NABARD, the SHG-Bank Linkage Programme, covers 14.2 crore families through 119 lakh SHGs (87% of which are women) with  savings deposits of INR 47,240.48 crore (March 31, 2022).
• NABARD has sanctioned a cumulative grant assistance of INR 255.81 crore to Joint Liability Groups Promoting Institutions (JLGPIs) for promoting 12.77 lakh JLGs (March 31, 2022). 

Benefits of Microfinance: 

• Credit to Low-income borrowers 
• Collateral free loans 
• Income generation 
• Women empowerment 
• Rural development 
• Encourage Self-Sufficiency and Entrepreneurship
• Financial inclusion

Challenges associated with Microfinance:

• Financial Illiteracy 
• Inability to Generate Funds 
• Heavy dependence on banks
• Weak Governance 
• Interest rate
• Regional Imbalances 

What more can be done? 

• Regulation of the sector is a need.
• Interest rate transparency should be maintained. 
• Encourage Microfinance penetration 
• Expand product range 
• Use of technology should be promoted.
• Different sources for raising funds are required to make the sector more functioning.

Conclusion: 

• The Microfinance sector has played an important role in ensuring inclusive and balanced development. 
• There is a need for comprehensive regulation to make it more inclusive and sustainable.

 News Source: RBI