The microfinance industry is in favour of a Rs 250-crore equity support fund for small lenders and a Rs 200-crore transformation fund to facilitate NGOs becoming lenders as part of their budget recommendations.

"In order to make the services of MFIs more available so as to cater the credit needs of the unreached population, they need to grow and expand for which growth capital is required," industry body Sa-Dhan said in a letter to FM Nirmala Sitharaman.

"The government may consider creating a special fund, similar to India Micro Finance Equity Fund (IMEF), within Nabard for extending equity support to small and upcoming MFIs. An amount of Rs 250 crore may be provided."

It said the debt-equity ratio of NBFC MFIs has largely remained stagnant despite a growth in the gross loan portfolio and the number of borrowers. The ratio was 3.5 in March 2021 and 3.6 in September 2023.

The industry body said that there is a need to increase the network with 70 per cent of the loan portfolio of the industry concentrated in 200 districts.

Sa-Dhan said that many NGOs and development institutions are operating in areas where mainstream MFIs are yet to venture. Some of the NGOs can be upgraded to MFIs with capital support.

"A transformation fund can be created and transformation equity can be extended to these NGOs. The fund can be housed in Sa-Dhan or DFIs like Nabard. An amount of Rs 200 crore may be allocated for the purpose," the letter said.

Sa-Dhan has also porposed a guarantee fund for small MFIs. It suggested a congenial environment, especially around talks of loan waivers as elections loom.

"Any external intervention can disrupt the repayment efficiency in the sector leading to losses. The government may consider enacting a law to stop such indiscriminate and across-the-board loan waiver," the letter said.