Lenders asked to tighten process for micro loans

The government has asked lenders to tighten the credit appraisal and monitor the fund usage in micro loans.

Lenders, on their part, have begun work on the creation of a unified business correspondent registry to track transactions of self-help groups (SHGs) and plan to assign unique IDs to SHG members to prevent multiple loans by the same members.

"There is a view that lending towards SHGs, which is largely done through joint liability groups, should be monitored more closely and the members should be encouraged to set up micro enterprises," said an official aware of the development.

As per the estimate of banks, the sector has an SHG-linked exposure of about ₹4 lakh crore. "There have been instances where, after being unable to repay, the members of SHGs set up another such structure and seek fresh loans," said a bank executive. That is why the government wants lenders to have more checks while sanctioning credit, this executive said.

There are more than 10 million SHGs.

These discussions are part of the government's ongoing push for broader financial inclusion. Earlier this month, it sought a status report from banks on the proposed business correspondent portal.

The unified business correspondent portal will be integrated with the Jan Dhan Darshak app, said another bank executive aware of the matter. This is expected to help the government and banks have access to geographical location data - like the number of transactions done and the amount - allowing them to work out strategies to target identified sectors.

"Already, Nabard is working under the National Rural Livelihoods Mission to help capture the data of SHGs on the number of times a group has availed of bank loan, loans fully repaid and existing credit sanctions across lenders," he said. This data will also be incorporated in the matrix of the Grameen credit score which aims to support the development of rural enterprises and empower rural communities.

Finance minister Nirmala Sitharaman said in her budget speech that public sector banks will develop a Grameen credit score framework to serve the credit needs of SHG members and people in rural areas.

On Tuesday, the Reserve Bank of India (RBI) lowered the risk weights for bank credit to NBFCs and microfinance loans. This comes even as the Micro Finance Institution Network has reported a 3.5% year-on-year fall in the sector's gross loan portfolio to ₹3.85 lakh crore in the third quarter of FY25.

In 2023, RBI had increased the risk weight on exposures of commercial banks to NBFCs by 25 percentage points (over and above the risk weight associated with the given external rating of NBFCs) in all cases where the extant risk weight as per the external rating of NBFCs was below 100%, leading to tightening of credit towards the sector.