Micro Lending Market Trends

Growth Drivers

• Flourishing agriculture industry - As agriculture becomes more intensive and technologically advanced the demand for financial services increases. Micro lending can provide small-scale loans to farmers and agribusinesses, helping them invest in seeds, fertilizers, equipment, infrastructure, and other resources. This, in turn, can boost agricultural productivity and sustainability.
  
  Moreover, many government and non-government schemes that provide agricultural funds play a significant role in driving the micro lending market. For instance, in 2023, the Agriculture Infrastructure Fund (AIF) under the Department of Agriculture & Farmers Welfare (Government of India) has stated that around USD 12 billion will be provided by banks and financial institutions as loans to Primary Agricultural Credit Societies (PACS), Marketing Cooperative Societies, Organizations (FPOs), self-help groups (SHGs), farmers, Joint Liability Groups (JLG), multipurpose cooperative societies, agri-entrepreneurs, startups and Central/State agencies or local body sponsored public-private partnership projects, state agencies, agricultural produce market committees, national & state federations of cooperatives, and federations of Farmer Produce Organizations (FPOs). This scheme will be disbursed from FY 2020-21 to FY2025-26, and the support under the scheme will be provided for FY 2020-21 to FY 2032-2033.
• Growing empowerment and autonomy of women - Empowered women, especially in developing regions, are increasingly seeking financial services to start and grow businesses. Several micro lending initiatives enable women to recognize their potential and take charge of their financial decision-making, which helps expand the demand for microloans. As per a report published in 2022 by the UN Women, laws and regulations that completely support the economic empowerment of 1.6 billion women and girls have been implemented in 44 nations.
• Surging adoption of advanced technologies such as artificial intelligence (AI) and machine learning (ML) - AI tools analyze customer data to provide insights into borrower needs and preferences, allowing lenders to engage more effectively and improve customer satisfaction. Moreover, automation of routine tasks such as application processing, document verification, and customer service improves operational efficiency and reduces costs for lenders.

Challenges

• High cost of loan administration – The high cost of loan administration can be a significant barrier to the growth of the market. Micro lending typically involves small loan amounts and a a large number of transactions, which can lead to disproportionately high administrative costs relative to the loan size. This can include costs related to loan processing, credit assessment, collection, and customer service.

• Exorbitant credit risk – Micro lending often involves borrowers with limited credit histories or financial stability, increasing the likelihood of defaults. High default rates can erode the lender’s profitability and overall sustainability.