Microfinance Must Prioritise Responsible Lending, Says IIM Professor
IIM Bangalore Professor MS Sriram warns that rapid microfinance growth has led to over-lending and debt distress, calling for sustainable lending practices.
The microfinance sector needs to slow down its aggressive expansion and pivot toward a model of responsible lending to protect vulnerable borrowers from falling into deep debt traps. This warning was issued by MS Sriram, a Professor at IIM Bangalore, during the 21st Annual National Conference on Inclusive Growth in New Delhi.
Speaking on the sidelines of the conference, Professor Sriram highlighted that the sector's meteoric rise in recent years has inadvertently triggered a crisis in several parts of India. The primary driver of this instability, he noted, is the phenomenon of over-lending.
The Perils of Rapid Expansion
According to Sriram, the drive for quick growth has led to a situation where borrowers are increasingly taking loans from multiple sources. This practice of multiple borrowing has left many low-income individuals in severe financial distress, as they struggle to meet the repayment demands of various lenders simultaneously.
The core issue identified during the conference was the tension between rapid sector expansion and the actual welfare of the customers. The discussions aimed to find a way to moderate this growth, ensuring that the pursuit of profitability does not come at the cost of social impact.
Bridging the Gap Between Regulators and Lenders
The conference served as a vital platform for stakeholders, including the Reserve Bank of India (RBI) and various microfinance institutions, to address these systemic challenges. Sriram emphasized that direct engagement between lenders and regulators is essential for a healthy ecosystem.
Key points of discussion included:
- Regulatory Insights: How discussions with the RBI help both institutions and regulators understand the ground realities of the industry.
- Interest Rate Concerns: Addressing whether increased competition in the sector should lead to lower interest rates, particularly for the poorest segments of society.
- The Role of RBI: Responding to concerns raised by RBI Executive Director Keshavan Ramchandran regarding whether the benefits of industry growth are truly reaching the end customers.
A Call for Sustainable Growth
The fundamental takeaway from the forum was the need for a shift in priority. Rather than focusing solely on scale, microfinance institutions must ensure that their growth is sustainable and that borrower welfare remains at the heart of their operations.
By fostering a closer relationship between policymakers and field-level practitioners, the sector can better address the realities of lending and ensure that microfinance remains a genuine tool for inclusive growth rather than a source of financial hardship.