Microfinance in India
Like many other countries, modern micro-credit/microfinance industry in India started in 1990s inspired by the Grameen Model of Prof Mohammad Yunus in Bangladesh. Overtime, as this model evolved and became successful, it boosted the confidence of customers, MFIs and other stakeholders and started to scale-up.
From 2005-6, many non-profit MFIs converted into for-profit NBFCs and many new for-profit NBFCs also entered the micro-credit business, attracting private capital, commercialization, professionalism, and scale. This fuelled growth, competition, scale with a sharp focus on specialization in delivering micro-credit efficiently and profitably. As a result, within 5 years, the micro-credit industry in India increased multi-fold to reach an outstanding of nearly Rs 20,000 Cr. However, this period also witnessed the challenges around customer-protection including over-leverage, inadequate disclosures, lack of customer awareness, high pricing as well as risks of geographic concentration, ghosts’ loans, local-level interferences and lack of regulations and oversight.
Recognizing this, Reserve Bank of India (Central Bank of India), introduced a new category of NBFCs called NBFC-MFIs in Dec 2011 with specific regulations for the micro-credit sector, focusing on customer protection. On the back of these regulations, the industry had a hugely successful decade.
Today, the micro-credit sector is diverse and competitive with over 100 regulated players – Banks, SFBs, NBFC-MFIs and NBFCs. To ensure a level playing field, in March 2022, the RBI introduced the harmonised guidelines creating an entity agnostic but activity-based regulation. A clear regulatory framework, a sound underlying business model, performance trends overtime, and potentially large un- met demand has attracted private capital to sustain the growth.
As a result, micro-credit in India remains one of the largest micro-credit sectors globally, quite unmatched in terms of its outreach with low-ticket loans, scale, diversity of supply-side, spread, efficiency, performance, customer-protection standards, and contribution of the private sector.