Central Bank Urges Caution In Microfinance Lending In Bihar And Uttar Pradesh

New Delhi, Jul 8 (KNN) The Reserve Bank of India (RBI) has reportedly advised microfinance lenders to exercise caution in loan disbursements in Bihar and Uttar Pradesh, according to sources familiar with the matter.

This guidance comes as a precautionary measure in response to potential market overheating observed in these states, reported Moneycontrol.

Bihar and Uttar Pradesh collectively represent 25.3 per cent of India's total microfinance loan portfolio, which primarily serves low-income women borrowers.

These states have also experienced rapid growth in microfinance assets under management since 2019.

Recent data from CRIF Highmark for the quarter ending March 2024 indicates higher-than-average multiple borrowing in both states.

In Bihar, 10.1 per cent of borrowers have loans from three lenders, while 8.7 per cent have loans from four or more. Uttar Pradesh shows slightly lower figures at 7.7 per cent and 6.6 per cent respectively, compared to the national average of 7.8 per cent and 6.4 per cent.

Industry experts note that this increase in multiple borrowing is significant compared to trends from three years ago.

The rapid expansion of microfinance institutions in these states, particularly in Bihar, has led to market saturation concerns. One small finance bank CEO remarked that Bihar has become a primary target for lenders exploring the North India market.

The regulator's cautious stance may be influenced by the memory of the 2010 microfinance crisis in Andhra Pradesh. With microfinance being relatively new in Bihar and Uttar Pradesh, particularly among low-income borrowers, a measured approach to growth could help prevent similar issues.

Industry associations, such as the Microfinance Institutions Network (MFIN), have reportedly begun discussions with lenders about the potential risks in Bihar. While both states are under scrutiny, sources suggest that the situation in Bihar is more critical due to its higher market saturation.

(KNN Bureau)