Microfinance’s contribution to India’s GVA likely to grow, says NCAER

NCAER said the contribution of the microfinance sector is significant to the economy with all its forward and backward linkages and its potential to create jobs. But at the same time, it said that monitoring the impact of lending on the borrowers and learning from it would be essential as households and enterprises moving to unsustainable debt positions could make the entire financial system unfavourable.

At least 5% of 5 crore microfinance borrowers are now not in a position to service their loans following the business disruptions caused by the pandemic.

“In this sense the microfinance sector will need flexibility to address the changing overall conditions both to contribute to the growth of the economy and also meet the credit needs of the lower income households and small enterprises,” NCAER said.

The economic research body predicted that the overall microfinance sector is slated to contribute, including the backward and forward linkages 3.52% of GVA under the best case scenario. The sector’s contribution may grow to 2.7% under base case while it may shrink to 1.54% under pessimistic scenarios.

“The role of microfinance, as a support to lower income households and small enterprises is of greater importance in a growing economy as it is in a scenario of weak growth,” it said.

The findings point to the risk factors for the sector in the medium-term prospects as a result of lower overall economic growth. “The implication for the sector is clearly to enhance its effectiveness in making the loans more productive in the borrower’s hands so that the client base can be sustained or improved, larger loans would be possible, and opportunities for diversification of its portfolio can be exploited,” NCAER said.

The study on the impact of microfinance on the economy, commissioned by microfinance industry body the Microfinance Institutions Network (MFIN), was published Wednesday by Niti Aayog vice chairman Rajiv Kumar. The report was ready a year back but the release was delayed due to the pandemic-led disruptions, according to MFIN chief executive Alok Misra.