RBI alerts microfinance lenders amid Bihar, UP loan surge

8 Jul 2024 , 03:32 PM

The central bank has advised microfinance lenders to reduce loan disbursements in Bihar and Uttar Pradesh as a precautionary measure. These two states constitute 25.3% of total microfinance loans, primarily serving low-income women borrowers with unsecured loans.

Bihar and UP have seen significant growth in assets under management for microfinance institutions since 2019. The advice to lenders, including banks and non-banks focusing on MFI loans, is in response to signs of market overheating, particularly evident in the March quarter.

According to CRIF Highmark’s recent report for March 2024, in Bihar, 10.1% of borrowers availed loans from three lenders, and 8.7% from four or more lenders. In UP, these figures were 7.7% and 6.6%, respectively, compared to the All-India averages of 7.8% and 6.4%.

The rapid growth in Bihar and UP prompted regulatory caution, especially given Bihar’s rapid market expansion in recent years. Industry insiders suggest Bihar has become highly competitive, with few untapped areas left for lending.

Concerns about credit penetration in these states, which are relatively new to regulated microfinance lending, echo past crises like Andhra Pradesh in 2010.

Industry associations like MFIN have raised concerns about a potential bubble in Bihar, emphasizing the need for cautious growth strategies. While UP still offers some growth opportunities, Bihar is seen as reaching saturation in microfinance lending markets.