RBI advice Microfinance Lenders: Details are here

RBI advice Microfinance Lenders: Details are here

RBI advice Microfinance Lenders: Details are here

The central bank has advised microfinance lenders to slow down on giving out loans in Bihar and Uttar Pradesh as a precaution, according to sources familiar with the matter.

These two states make up 25.3% of all microfinance loans, which are mostly unsecured loans aimed at low-income women borrowers. Since 2019, Bihar and UP have seen rapid growth in the assets managed by microfinance institutions.
The advice to lenders—including banks, small finance banks, and non-banking financial companies focused on microfinance—comes in response to signs of market overheating, particularly noticeable in the March quarter.

A recent report by CRIF Highmark showed that as of March 2024, 10.1% of borrowers in Bihar were taking loans from three lenders, and 8.7% were borrowing from four or more lenders. In UP, the figures were 7.7% and 6.6%, respectively. The all-India averages for these categories were 7.8% and 6.4%, respectively.
“This is a reasonable increase compared to borrowing trends three years ago,” said a CEO of a non-banking financial company focused on microfinance, who preferred to remain anonymous.

The rapid growth in Bihar and UP since 2019 likely prompted the regulator to take a cautious stance. “Growth in UP and Bihar has been extremely fast in the last four years, especially in Bihar. A few years ago, there were about 30 microfinance lenders in Bihar. Now, it has become the go-to state for everyone wanting to explore the North India market,” said a CEO of a small finance bank.

As a result, the opportunity to lend to creditworthy borrowers in Bihar is decreasing. “It’s a highly saturated market now with very few new areas to explore,” said another senior executive of a small finance bank. Another executive noted that Bihar has quickly shifted from a low-risk to a high-risk market in terms of credit potential. Bihar, which accounts for 14.8% of total microfinance assets under management, is now the largest state for microfinance loans, overtaking West Bengal and Tamil Nadu.

The regulator is also worried that since regulated credit penetration, particularly in the low-income segment, is relatively new in Bihar and UP, slowing growth may be necessary to avoid a crisis like the one in Andhra Pradesh in 2010.

An email sent to an RBI spokesperson for confirmation went unanswered.

Industry associations like the MicroFinance Institutions Network (MFIN) have warned lenders about a potential bubble in Bihar, sources said, requesting anonymity. “There were discussions about the need to be cautious about growth in Bihar in a recent meeting,” said a senior executive familiar with the matter.

However, industry sources said the situation is more critical in Bihar than in UP. “UP, being the largest state, still has some areas lenders can explore, but Bihar is showing signs of a highly saturated market.”