Give man a fish; he’ll eat for a day. Give a woman microcredit, she, her husband, her children and her extended family will eat for a lifetime.” – Bono
Microfinance Institutions are doing a phenomenal job in providing credits, loans, insurance and other associated benefits to the borrowers of the lower pyramid, and have covered around 64 million unique people all around the globe. These are mainly those underprivileged people who are left behind by the traditional giant financial banks. 80% of these borrowers are women of which 65% have a rural background. Today, the global microfinance industry worth is INR 8.90 trillion and is continuously growing at the rate of 11.5% over the last 5 years.
South Asia has named itself ahead in the queue, that too, particularly India, which is heading at 13.8%. Institutions that lend to the Indian borrowers are mainly Banks, MFIs, NBFCs, and Not for Profit MFIs. The largest loan share is disbursed by MFIs that stands at INR 681 Billion or 38% of the total, which is further followed by Banks and SFBs. These multiple players have their own share of strengths and weaknesses, thus there was a need for a better collaborative approach. RBI in 2018 issued a circular for co-working of the banks with NBFCs/MFIs. NBFCs would benefit the banks by bringing liquidity in the market, as the people in this organisation are closer to the rural mass and value their culture; whereas the banks would be the risk bearer of the credits because of their work culture and high money deposits. One of the successful examples being, Shared Agent Banking System (SABS), Uganda created a joint venture between Uganda Bankers Association and Electrics International for a centralised connectivity among the institutions.
Today, there are two models which are prevalent in India for the disbursement of loans, Self Help Group (SHG) and Joint Liability Group (JLG). SHGs provides micro financing that mainly focus on generating savings, has an average size of 10-20 members which mainly include women and is less scalable than JLGs. JLG on the other hand, is a micro credit organisation that focuses on credit generation, has a size of 3-10 members per group and is more scalable. Since JLG has a more commercial approach, has faster turn-around, and a joint liability approach that helps in mitigating risks, hence is preferred by the NBFCs. There has been a great upsurge by 46% in the total number of JLGs from FY18 to FY19, and is greatly supported by NABARD. In the FY19, NABARD entered into 7 MoUs with SBI for initiating training, capacity building and skill development for promoting JLGs. SIDBI disbursed INR 10 Billion fund to the microfinance institutions.
Because of various Government schemes and interventions and the Micro finance Institutions, 67% of the rural Indians have already been benefited, but this percentage is not uniform all across the country. Karnataka, Andhra Pradesh, Maharashtra, Tamil Nadu and few other Southern states constitute around 80% of it, while only the rest mere percentage is constituted by the northern states of the nation. People there still believe in taking loans from informal distributors like moneylenders and relatives. Yet there is a high possibility of getting this gap filled if these institutions carefully address needs and problems underlying rural India.
As the purchasing capacity of Indians is slowly heading ahead, there’s a need to look outside the credit-savings balance and enter into the consumption based needs like the hospital fees, education loans, marriage funds, etc. But before that, bringing in financial service literacy among the rural should be the priority. According to the executives of the microfinance institutions, 37% of the people are left underserved due to the lack of transfer of information. They must also analyse all the costs associated with taking the financial services, loans, transportation cost, and interest poured in case of delay of instalments. And then introduce their products and services at a cost which would benefit the farmers by giving a sufficient return.
There are lots of constraints to be witnessed along with the rising height of microfinance industries, majorly fraud, security risk, credit risk, inefficiency and what not. Also, over-borrowing, regulatory changes (example being AP Crisis 2010), and income incompetency among the rural households is another major fear which resides with any of these industries. There are around 35% borrowers who borrow from 2 sources. This leads to over borrowing and increased risks for the institutions.
“Technology is at its best when it brings people together.”
There’s a high demand for technology not only for bringing in new customers, but also for making connections with the old ones. The technology needs to be very accessible so that the people get to know all the loan portfolios and information about other services at their doorstep. This would help in declining the operational cost, thereby decreasing the rate of interest which is charged today, hence increasing the customer base.
Government has played a significant role in educating people about the benefits of these financial institutions. Micro Units Development and Refinance Agency Ltd (MUDRA) Yojana, loan co-origination and investments in the private sectors are few of big contributions of the government. For the ease of women for issuing of credits, many literacy programmes are being run and starting of a new venture has been made easy for them. Schemes like Pradhan Mantri Mahila Shakti Kendra has been built so as to provide a healthy environment for understanding business and to boost their morals. In addition to it, Government has increased the capacity of lending to the farmers from INR 1 lakh to INR 1.25 lakh.
India aims to become a 5 Trillion economy by the end of year 2025. And there would surely be a big role of Microfinance and Microcredit Institutions in achieving the same as they work in sync for reducing poverty. The future would be in the hands of those groups that could provide varied types of financial assistance and associated products at a lower cost, entertain new products, involve in strategic partnerships and involve technology to cater to the demands of people.