RBI asks microfinance lenders to go slow in Bihar, UP

Reserve Bank of India asks microfinance lenders to go slow in Bihar, Uttar Pradesh

The central bank has asked microfinance lenders to go slow on loan disbursements in Bihar and Uttar Pradesh as a precautionary measure, people familiar with the matter said.

The two states account for 25.3% of total microfinance loans, unsecured loans primarily catering serve low-income women borrowers. Bihar and UP are also among the fastest growing states in terms of assets under management for microfinance institutions since 2019.

The advice to lenders—banks including small finance banks and non-banks focused on MFI loans—is in reaction to signs of market overheating, which became particularly visible in the March quarter.

According to a recent report by CRIF Highmark, for the quarter ended March 2024, the number of borrowers availing loans from three lenders stood at 10.1% of total outstanding loans, while the number of borrowers availing loans from four or more lenders stood at 8.7% in Bihar. In UP, these numbers stood at 7.7% and 6.6% respectively. The All-India average for the number of borrowers availing loans from their lenders and from four or more lenders stood at 7.8% and 6.4%, respectively.

“Compared to the borrowing trends that prevailed three years ago, this is a reasonable increase,” said a CEO of a NBFC-MFI who didn’t want to be named.

Fast growth in Bihar and UP since 2019 may have prompted the regulator to take a cautious stance on the two states. “Growth in UP and Bihar has been extremely fast in the last four years, particularly in Bihar. A few years ago, there were just about 30 MFI lenders in Bihar. Now, Bihar has become the go-to state for every player wanting to explore the North India market,” said a CEO of SFB.

Consequently, the opportunity for lending to creditworthy borrowers is said to be reducing in Bihar. “It’s a highly penetrated market today with very few white spots,” said another senior executive of a small finance bank. Another senior executive points out that Bihar’s transition from green to red in the sensitivity analysis chart, which gauges the credit potential of markets across the country, has been the fastest. It may be pertinent to note that Bihar, which accounts for 14.8% of total MFI assets under management, is presently the largest state for MFI loans, overtaking West Bengal and Tamil Nadu.

The regulator is also concerned that with credit penetration though regulated entities, particularly in the low-income segment, being a relatively new practice in Bihar and UP, a calibration in growth may be essential to avert a crisis like the one that broke out in Andhra Pradesh back in 2010.

An email sent to an RBI spokesperson seeking confirmation on the matter remained unanswered.

Lenders have been sensitised about a possible bubble brewing in Bihar by industry associations such as MFIN or MicroFinance Institutions Network, the people cited above said, requesting anonymity. “There were discussions around the need to be careful about growth in Bihar in one of the recent meetings,” said a senior executive familiar with the matter.

That said, industry sources said the situation is more critical in Bihar than in UP. “UP, being the largest state, still has a few areas that lenders can explore, but Bihar is showing signs of a highly saturated market”.