Risk Management Practices in Indian Microfinance Sector: A Study of Some Selected Institutions in West Bengal

Introduction

The Indian Microfinance Sector has witnessed a phenomenal growth over the past two decades. Self Help Group Bank Linkage Programme (SBLP) is a step to bring the “unbanked” poor into the formal banking system and to inculcate thrift and credit habits. SBPL has now become the largest community based microfinance initiative with 85.77 lakh SHGs as on 31 March 2017 covering more than a hundred million rural households (Status of Microfinance in India 2016-17, NABARD).

The quantum of credit made available to the poor and financially excluded clients has gone past Rs. 60,000 crore and number of clients benefitted is close to 40 million as of March 2017 (According to Bharat Microfinance Report, 2016-17). The role of Microfinance Institutions (MFIs) in providing financial services to those who could not be served by formal banks is found to play a prominent role. The MFIs has grown remarkably during past two decades, spreading across the country reached 31.4 million clients all over India. The total number of SHGs under MFIs stood at 46.72 lakh with a total loan amount outstanding of Rs. 57119 crore. Microfinance institutions (MFIs) exist to fulfil a dual mission – financial sustainability and positive social impact on the urban and rural poor of the communities that they serve. Thus MFIs try to simultaneously achieve this twin goal of access (by the poor) and sustainability (of the institution or its micro-credit portfolio). Twin performance measures of MFIs with Access and Sustainability are shown below in Table 1.

In India, MFIs provided loans for consumption and productive purposes, a major part of the credit flow, 94% are channelized for income generating activities. Agriculture, Animal husbandry and small trading are the major income generating activities that account for 79% of the micro credit provided by MFIs (2016). Non-income generating loans are mostly used for consumption, housing and education of children of their clients. The RBI issued guidelines to regulate NBFC-MFIs and retain Priority Sector Lending status for MFIs. These guidelines ensure transparency in disbursement of loans and other services offered by NBFC-MFIs by requiring them to assess client indebtedness before loan disbursement to avoid over indebtedness. MFIs are also asked to set up grievance redressal cells, thus ensuring client protection.