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MFIs' role as banking correspondents pays off

By:  GK Gupta (ET) , Place:  Chandigarh ,  Update:14 Sep 2017
Reserve Bank of India's decision to allow micro finance institutions (MFIs) as business correspondents for banks is proving to be a success in ensuring steady flow of funds towards the unbanked sector despite the fact that several micro lenders face difficulty in raising growth capital. 

Last fiscal saw 27 per cent growth in business correspondents with the share of this off-balance sheet portfolio for MFIs rising to 20 per cent from 13 per cent in the preceding fiscal, according to data from the Bharat Microfinance Report 2017. 

RBI allowed MFIs, NGOs and other civil society organisations to work as banking intermediaries for providing financial and banking services in January 2006. The loans MFIs deliver as banks' partners are not in their balance sheet and therefore this model helps their business grow without additional fresh capital. 

"This is the way of optimising capital, especially by smaller MFIs which cannot raise it easily," said Manoj Nambiar, MD at Arohan Financial Services. "If such partnership is done properly, it would be a value creator." Total BC portfolio of MFIs was Rs 10,131 crore out of their gross loan book of Rs 46,842 crore. 

Banks and MFIs, which enjoy the last-mile connect with a cost effective delivery model, benefit from such partnerships. While banks fulfill their priority sector obligations through indirect lending, MFIs can grow customer base with bank loans and earn a fee. The gross loan portfolio of 168 MFIs including NBFC-MFIs and NGOMFIs stood at Rs 46,842 crore. This was excluding the portfolios of Equitas, Ujjivan Financial Services and four other MFIs which transformed themselves into small finance bank .. 

"With the transformation of larger MFIs into small finance banks, the MFIs' sector may not see high growth like 40-50 per cent any more. Yet there would be sufficient demand for micro loans as the country still lacks financial penetration and one can expect 15-20 per cent growth in the next couple of years," Sa-Dhan executive director P Satish said. 

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