India's Robust Priority Sector Lending Structure Will Help Microfinance Institutions, Says Muthoot Microfin CEO Sadaf Sayeed

Sadaf Sayeed, the CEO of Muthoot Microfin Ltd which is a microfinance subsidiary of Muthoot Pappachan Group, has been a busy man lately. In July the company filed documents with the Securities and Exchange Board of India seeking permission to raise Rs 1,350 crore through initial public offering (IPO). Sayeed has been getting things in order for the launch of the IPO. 

Amid a super tight schedule Sayeed attended a panel at the Global Fintech Fest 2023 (GFF '23) in Mumbai which discussed the need for integration of digital microfinance to boost economic centricity. During the discussion Sayeed said he was hopeful for the growth of the microfinance sector in India, “G20 will surely boost the microfinance sector and we expect the fintechs and digital inclusion will further help the customers to avail loans and ease the process.” 

A major focus of the GFF incidentally was to explore how the fintech ecosystem can aid India’s microfinance sector by  reaching out to the underbanked population of the country.   

Of the total loan portfolios Muthoot Microfin Ltd has disbursed so far, more than 95% went to rural female customers from the remotest corners of the country. Sayeed told The Core, “The Microfinance Joint Liability Group (JLG) model is based on women groups jointly borrowing money, thus Muthoot Microfin offers income-generating loans to women in underserved areas and intends to provide capital for their micro/small businesses.” 

Sayeed spoke to The Core on the sidelines of the conference about the future of the microfinance sector in India and how the sector is expected to boost the Indian economy in the coming years. 

“India has a very good structure in terms of priority sector lending from the banks and other banking institutions. We have concrete priority sector lending norms in place and because of those, the banks are lending to microfinance institutions (MFIs),” Sayeed said. 

Sayeed believes empowering rural customers and making them financially independent can boost the Indian economy. His positive outlook and strong determination helped the company to maintain profit even at the time of Covid-19 when the entire banking sector was suffering under the pressure of loan defaults. 

 

Here are edited excerpts from the interview: 

 

You once mentioned that more than 95% of loan portfolios belong to women borrowers from the remotest corners of the country. Why do you think the microfinance sector focuses largely on women borrowers ?

The Microfinance Joint Liability Group (JLG) model is based on women groups jointly borrowing money from MFIs, thus Muthoot Microfin offers income-generating loans JLG format  to its women  clients residing in underserved areas and needing capital for their micro/small businesses. We offer financial services in the form of collateral-free microfinance loans and provide skill training and financial literacy to our clients to support and enhance the earnings potential of our customers.

 

You mentioned recently that the microfinance sector will be a major driver of the Indian economy. Can you please explain how you expect the sector to contribute significantly to Indian economic growth? 

The biggest amount of growth that can happen now is from the informal segment getting formalised and this can happen via introduction  and use of more and more digital technologies . This will enable anmore and more formal transactions coming into the space, the digital economy will be boosted.

As we move from a low-income category of the nation to a middle-income category, we will have more economic activities  happening at bottom of pyramid and more investment coming towards India thereby, boosting the economy. 

With the help of the microfinance sector, a large part of the population is coming out of poverty and participating in the growth , especially the women entrepreneurs . Microfinance sectors are thus playing a role in poverty reduction. As several businesses  want to come to India microfinance will have an important role to play. 

 

Unlike other microfinance sectors in other countries, India does not have a definite funding institution for the sector. How can the sector overcome this?

India has a very good structure in terms of priority sector lending from the banks and other banking institutions. We have concrete priority sector lending norms in place and because of those, the banks are lending to microfinance institutions. I think that is a much more robust framework than having one single funding institution. We have institutions like SIDBI (Small Industries Development Bank of India) and NABARD (National Bank for Agriculture and Rural Development) that support microfinance. I believe it is much more structured. 

 

Often it is said the Indian microfinance sector is inspired by the microfinance set-up of Bangladesh, introduced by the Nobel laureate Professor Muhammad Yunus. What according to you is the major difference of the microfinance sector of the two countries?

In Bangladesh, most MFIs are allowed to take deposits, whereas in India not all MFIs like NBFCs don’t have the permission to accept deposits. Only small finance banks (SFBs) and banks are allowed to take deposits in India. However, despite that  in India, MFI offerings  without having access to deposits are available at much more affordable rates as compared to other parts of the world. 

I believe we have a robust structure and the priority sector lending helps in the development of MFIs. We have dedicated institutions like NABARD and SIDBI who are funding in the right amount. I don’t see we lack anything structurally as compared to Bangladesh in terms of not having a funding institution or not having access to deposits for that matter.

 

The size of the write-off constitutes 7.7% of the sectoral loan portfolio of Rs 3.38 lakh crore, as per the recent report released by Crif in July. Why is there a surge in the write-offs in the recent months? 

I don’t think the write-offs for the loans are increasing incrementally, it is just the write off of loans that went into defaulted during Covid is happening now. In fact, the disbursement after the Covid has gone up considerably well and portfolio quality has improved . It is only that the microfinance companies are identifying the irrecoverable amount  and writing off now .

Thus, temporarily the percentage of write-offs has increased which I believe is a good sign, as it means the institutions are able to identify the loan books and there is less chance of carrying the baggage of non-performing assets or NPAs. They are just writing off a part and moving on. It is also possible because the portfolio quality of the loans disbursed after Covid-19 has improved significantly.

 

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