India’s microfinance sector faces challenges as Bihar records high bad loans: report

India’s microfinance sector is grappling with significant challenges, as highlighted in a recent report by Motilal Oswal, which highlights that states like Bihar are emerging as hotspots for bad loans, reflecting deep regional disparities in the microfinance landscape.

The microfinance sector in difficulty

The report highlights that while some regions maintain healthier loan portfolios, Bihar accounts for a disproportionate share of bad loans, highlighting broader inequalities in financial inclusion.

“Another significant problem is the uneven distribution of microfinance penetration and associated risks. States like Bihar are disproportionately responsible for high bad loans.” The report highlights that these regional imbalances not only highlight the uneven penetration of microfinance, but also reveal operational inefficiencies.

These inconsistencies raise concerns about the effectiveness of existing policies and highlight the need for tailored approaches to address the unique socio-economic challenges of different states.

A major concern flagged in the report is the issue of over-indebtedness. Many borrowers, burdened by excessive debt with multiple lenders, face repayment difficulties.

The report says this situation has worsened due to gaps in borrower identification processes. In 2017, the industry shifted from Aadhaar-based identification to voter ID-based verification.

“Robust regulatory measures are needed”

Unlike Aadhaar, voter cards do not have a centralized and secure system, which allows some borrowers to use multiple voter cards to obtain loans from various lenders. This bad practice has exacerbated over-indebtedness, increasing the risk of payment default.

“While voter ID cards serve as verification documents, they lack the secure, centralized nature of Aadhaar, allowing some borrowers to use multiple voter ID cards to obtain loans from from multiple lenders,” the report said.

Microfinance institutions (MFIs) also face performance challenges, with increasing provisioning requirements to guard against potential bad debts. Additionally, overindebtedness and high interest rates have eroded borrower confidence in some regions, further straining the financial health of MFIs.

The report warns that without immediate intervention, these problems could escalate into a systemic crisis, threatening the sustainability of the microfinance sector.

Addressing these challenges will require robust regulatory measures, improved borrower identification processes, and region-specific strategies to promote financial inclusion and stability.

(With the exception of the title, this article has not been edited by the FPJ editorial staff and is automatically generated from an agency feed)