Palli Karma Sahayak Foundation (PKSF)

May 13, 2023

Microfinance lenders play a crucial role in providing financial services to underserved populations, but they often face challenges in accessing a steady flow of funds, particularly during difficult times. To address this issue and ensure the long-term sustainability of the microfinance sector, lenders are contemplating the formation of a dedicated funding institution in line with the Palli Karma Sahayak Foundation (PKSF) in Bangladesh.

Challenges in Mobilizing Funds

Microfinance lenders, especially small and medium-sized ones, frequently encounter difficulties in mobilizing funds. While larger non-banking financial companies (NBFC-MFIs) find it relatively easier to secure funds from banks, smaller players struggle to access sufficient financing. This disparity creates a funding gap that hinders the growth and stability of the sector.

The Role of SIDBI and Mudra Ltd

In the past, the Small Industries Development Bank of India (SIDBI) played a significant role in supporting microfinance lenders. However, the focus of SIDBI has diversified, making it challenging to provide dedicated attention to microfinance institutions (MFIs). Although Mudra Ltd offers loans to non-corporate, non-farm small and micro enterprises, it does not exclusively cater to the needs of MFIs.

Limited Access to Deposits

MFIs in India primarily rely on funding from banks and financial institutions, facing restrictions on accessing deposits. This limitation poses challenges, particularly during times of crisis or natural disasters when additional funds are required for client rehabilitation. To overcome this hurdle, industry experts suggest the need for a dedicated apex lending institution that complements existing lending institutions.

Drawing Inspiration from Bangladesh

The team of Indian microfinance chief executives recently visited Bangladesh to study its successful microfinance model. In Bangladesh, the Palli Karma Sahayak Foundation (PKSF) serves as a dedicated institution established by the government to provide debt support to not-for-profit micro lenders. This visit inspired Indian leaders to explore the possibility of establishing a similar institution to bolster the MFI sector in India.

The Way Forward

Creating a dedicated funding institution would ensure a steady flow of funds to microfinance lenders, enabling them to better serve their clients and contribute to financial inclusion. Such an institution could address the unique requirements of MFIs and provide flexibility in lending policies during challenging circumstances. Additionally, the government and Reserve Bank of India could consider allowing MFIs, especially those under RBI regulation, to accept small savings within prescribed limits, similar to the deposit system in Bangladesh.

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