India’s microfinance sector has been advised to widen its product offerings as the Reserve Bank of India pushes lenders to adopt new asset classes for better stability and greater economic impact. At a seminar in Kolkata, a senior RBI official said that microfinance companies serving bottom of the pyramid customers need to reduce their dependence on joint liability group lending and move into secured products.
The RBI official DR Bagada said, “Far too long, the microfinance sector has depended on joint liability group based lending. They need to explore inventory financing, capital asset financing instead of giving only entrepreneurial loans.” The event was organised by a common industry association.
This message aligns with comments made by deputy governor Swaminathan J last month. He said microfinance institutions should shift “from mono product to micro enterprise finance,” and urged them to design products that reflect the growth pattern of small businesses. He explained that businesses often start with a working capital loan but eventually need inventory finance, capital asset financing and payment support.
Inventory finance helps traders manage cash flows between buying and selling, while capital asset financing supports the purchase of machinery and long term assets.
Earlier in June, the RBI eased qualifying asset criteria for NBFC MFIs, allowing more diversification. These institutions must now hold at least 60 percent of total assets as microfinance loans, down from the earlier 75 percent requirement. While some lenders have expanded into MSME loans, gold loans and loans against property, diversification still remains limited.
Smaller MFIs have expressed concern over insufficient bank funding. Kartick Biswas from a microfinance organisation said banks lend only when they need to meet priority sector norms. However, a senior official from a major bank said credit ratings of smaller MFIs remain a challenge.
Jiji Mammen from a sector self regulator suggested that grading may be a more suitable benchmark than ratings for smaller institutions, as achieving an A rating is difficult for them.
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