From humble beginnings in mid 1970s to 2019, the Indian microfinance sector has come a long way with its ups and downs over the years. Inspired by the Grameen methodology pioneered by Dr. Mohammed Yunus from Bangladesh for which he and Grameen Bank won the Nobel Peace Prize in 2006, the joint liability group lending template has been an excellent model for borrowers from economically weaker section to get inducted into a formal credit and payment discipline.
Early estimates show that the industry would have closed Mar’19 with a credit portfolio outstanding of nearly Rs 2,00,000 crore serving over 50 million end clients (of which 95% plus are women and for most of whom this would be the first credit facility in their life) across 30 states through an employee strength of over 1 Lakh. For an industry almost written off in mid-2011 after the Andhra Pradesh (AP) crisis, this is no mean feat indeed.
( Source: MFIN Micrometer, Sa-dhan Bharat Microfinance report)
In a country with a population of over 1.3 billion, even with the significant progress made in the last five years, the current inclusion numbers are revealing:
- Over 79.8% have a bank account in their name – 41.1% being active
- Just 8.1% has access to a formal credit facility
- Under 25% has any insurance cover in rural India
- Under 18.9% are part of any pension plan in rural India
Source: The Global Findex Database 2017, NABARD All India Financial inclusion survey 2016-17
Needless to add, the situation across different states varies with central, east and north east being the less financially included (CRISIL Inclusix Index 2018) region. With the huge market opportunity as the backdrop, four aspects have helped the growth so far – the RBIregulations defining the microfinance sector post the Malegam Committee Report (MCR), the Credit Bureau discipline, funding by equity investors and priority sector lending by banks, and the licensing of the industry Self-Regulatory Organisations (SRO) – MFIN and Sa-Dhan.
What these have created is a tried and tested asset class with a greater than 99% collection efficiency which in a normal steady state delivers a 25 to 50 bps credit loss in an unsecured lending product – most so-called secured asset classes like mortgage/ vehicle financing have reported higher credit losses.
So what can derail the significant growth that the microfinance sector has shown till now – simply put indiscipline. Indiscipline by lending institutions causing multiple lending leading to default, not sharing lending and repayment information on time to the credit bureaus, indiscipline of lending to delinquent clients and the big one – unilateral loan waiver announcements by individuals/ entities without any intention or plans of paying up on behalf of the borrowers and thereby disrupting the credit discipline created with so much effort and time.
Among the indiscipline issues stated above, the first three are sought to be addressed by the Code for Responsible Lending (CRL) in microfinance put together by the SROs and other industry associations. The last one which loosely borders on “financial vandalism” needs judicial safeguards like the one where courts have ruled that any damage caused to public/ private property by an organized and directed mob will need to be paid for by the entity organising the rally/ gathering.
In terms of reach, microfinance sector has created an astonishing last-mile connectivity infrastructure where over 60,000 lending officers meet 100% of their clients every week/ fortnight/ month. This translates to over a billion transactions per year – imagine the cost savings and efficiency if migrated to a payments platform. Simply put, this incredible financial inclusion expressway can be leveraged to offer financial literacy to existing and potential customers leading to a much higher level of financial inclusion across the six key aspects, as defined by RBI, of having access to a bank account, formal credit facility, insurance cover, pension, savings accounts and investment options.
This efficient network can be used under a private – government partnership to manage many of the subsidized lending schemes required to assist the BPL families to get into an income generating livelihood activity. Imagine the reach and efficiency which will be created to address credit demands of the tiny and micro business enterprises. Its impact on employment generation in a country where that is now a national priority can be game changing.
What will be needed to work towards this goal?
Recognition by all the regulators that this is the effective network to reach the BoP beneficiaries across credit, insurance, banking services, pensions; regulations which are forward-looking and aid the development of the sector; enough certainty for potential investors to invest and build net worth for growth leveraging bank funding; empowering the SROs to manage the ground level adherence to policies like credit reporting, code of conduct and last but not the least addressing “financial vandalism”.
The vision statement of one of the industry SROs talks of “financially empowering 100 million households”. In order to meaningfully address this lofty goal, it would be important to rename this sector as the financial inclusion space, open it up to new segments like the tiny and micro enterprises which desperately need formal credit, free up restrictive regulations and allow private enterprise to invest and take off.
With the above, we could aspire to financially include over 400 million lives in India – a national priority.
The writer is MD of Arohan Financial Services Limited, an Aavishkaar Group company and also sits on the board of MFIN, the industry SRO.