Microfinance Booms in Bihar, UP, and Karnataka: A Tale of Growth and Caution

The microfinance sector in India sees rapid expansion with states like Bihar, UP, and Karnataka leading growth. High penetration rates suggest potential saturation, necessitating caution to manage borrower leverage and sustain future growth.

States such as Bihar, Uttar Pradesh, and Karnataka are emerging as growth leaders in India's microfinance sector, according to a report from HDFC Securities. The microfinance industry is expanding at an impressive pace, with these states significantly outpacing overall industry growth rates.

The report highlights the robust growth of the microfinance institution (MFI) sector in states like Bihar, Tamil Nadu, UP, and Karnataka, where activity has intensified. While the national MFI penetration rate is robust, states like Bihar exhibit penetration levels of over 80 percent, Tamil Nadu at approximately 53 percent, and Karnataka at around 57 percent, indicating possible growth saturation in these regions.

Despite the burgeoning growth, potential challenges loom. The high penetration rates in leading states suggest they might be nearing saturation, possibly limiting future growth prospects. This dynamic could spur contributions from less penetrated states as the microfinance industry searches for new expansion avenues.

Non-banking financial company microfinance institutions (NBFC-MFIs) have witnessed distinctive gains, increasing their market share from 31 percent in March 2021 to 40 percent by June 2024. This rise highlights the strategic growth executed by NBFC-MFIs, particularly in underserved areas. The sector, valued at Rs 4.2 trillion, experienced a compound annual growth rate (CAGR) of 20 percent from FY21 to FY24.

Growth has been driven by a rise in borrower numbers, which saw a 13 percent CAGR, and an increase in average exposure per borrower, at 6 percent CAGR. However, borrower over-leverage, particularly in high-growth areas, poses concerns. The report underscores the need for prudence in managing borrower exposure to foster sustainable growth, while adhering to Reserve Bank of India regulations.

(With inputs from agencies.)