Heatwave and Elections Lead to Contraction in India's Microfinance Sector

New Delhi, Aug 28 (KNN) For the first time in 12 quarters, India's microfinance sector has faced a contraction, with the outstanding gross loan portfolio dropping to Rs 4.33 lakh crore at the end of June 2024, from Rs 4.42 lakh crore three months earlier.

This 2 per cent decline marks a significant shift in the sector's growth trajectory, according to Sa-Dhan, an industry body citing data from credit information company Crif High Mark.

The contraction is largely attributed to a severe heat wave in North India and disruptions caused by the two-month-long general elections.

The extreme temperatures affected economic activities, particularly in rural areas where microfinance plays a crucial role. The elections also diverted resources and created uncertainty, impacting loan disbursements and repayments.

In addition to these challenges, funding constraints and an over-extension of credit in some regions have further slowed growth.

"There has been an overheating of credit in certain geographies,"

Sa-Dhan reported, highlighting the cautious stance adopted by both lenders and borrowers amid these conditions.

Analysts suggest this could be a temporary setback for the microfinance sector, which has seen robust growth over the past few years.

However, the contraction underscores the need for microfinance institutions (MFIs) to enhance their risk management practices and diversify their strategies to better withstand external shocks.

Looking ahead, a potential recovery is expected with improved economic activity post-elections and relief from the monsoon season. Nonetheless, the sector must address its structural issues and adapt to a rapidly changing financial landscape to sustain future growth.

The recent downturn serves as a reminder of the sector's vulnerability to external factors and the importance of building resilience to maintain stability in challenging times.

(KNN Bureau)