Banking Article, Banking Finance 2021, Banking Finance July 2021

Pillar of Financial Inclusion –Microfinance

Access to conventional banking by all is the agenda of government and financial watchdogs and controller. If the financial network is considered with spider web, the ultimate concern is to connect the web strings to the services of small business entity and poor individuals. Microfinance includes microcredit which facilitates small loans to basic elementary clients; savings of the surplus money; micro insurance and payment network and coverage. The target group is usually poor population segments, socially marginalized , isolated and uplift them for making them sufficient enough to proceed with their procedural workings and rotate the cycle to earn enough to recycle ,service the interest of loan, pay out the installments and to scoop out the surplus as savings or investments.

In initial stages microfinance has limited coverage like providing loans to poor entrepreneurs and small business lacking access to credit. The relationship based banking for individual entrepreneurs and small businesses was one of the roadways for defining the ambit of microfinance. The other path was aggregate based where several entrepreneurs come together to apply for loans and other financial services as a group entity.

Evolution is the mechanism for a modification with time variable. Microfinance emerged as a spurt and came out with a movement having objective to reach poor and deprived people and households with an array of quality products and services in financial sector without limitation to just credit but also savings, insurance, payment services, fund transfers. The narratives derived from the microfinance were different from one to another. It was described as a catalyst to economic development, creating opportunity for the employment creation and enhancing the growth of the economy. Some of them were of the opine that microfinance is to optimally managing the finances of the poor. Certain sets of activities classified to be financial in developed countries are not monetized in developing countries. The cause behind the same is due to scarcity of dispensable income. Last two decades have witnessed microfinance as sector to satisfy the unmet demands of the poor, isolated group at a large scale.

Specifically emphasizing about the women entrepreneurs, microfinance has created platform for them to start and explore the potential of their skills and talents. It is not only creating jobs for women but also opens the door for investment, savings, educating wards and also setting example for others. According to a joint report by Bain & Company and Google, Women in entrepreneurship can generate 150-170 million jobs in India, which is more than 25 percent of the new jobs required for the entire working age population by 2030.The report titled “Women Entrepreneurship in India-Powering the economy with her” has found that of the 432 million women in working age, about 343 million are not paid formal workers. An estimated 324 million of these women are not in labour force, and another 19 million are in the labour force but are not employed. The report suggests that in addition to job creation by private and government sectors, entrepreneurship is an untapped opportunity for working age women in India. There has been growth of about 6 percent from existing 14 percent to 20 percent in context of women-owned enterprises. The structure of women owned enterprises in India are largely single person type which results to lower returns and employment. The report also states that women enterprises are often over represented in numbers as survey across parts of India suggest that 10-30 percent ”women-owned” enterprises are often not run by women. Women’s Labour force in India is among the lowest bands in the world. 75% of Indian women of economically active age are not engaged in formal and paid work today. The real scenario is that total share of enterprises that are truly owned and run by women is lower than 20 percent. The report suggests that an all-States efforts focused on enabling women entrepreneurs to start up and scale could increase direct employment by around 50-60 million people and increase indirect and induced employment of 100-110 million by 2030.

Economic conduit designed to help out the poor to drain the poverty from within. It is believed by the experts that microfinance can facilitate the way to reduce the poverty figures of the Indian economy, empowering the lady power and raise the standard of living. The statistics of providing bank accounts to adult population across the country through Pradhan Mantri Jan Dhan Yojana (PMJDY) in 2014 was one of the initiatives towards financial inclusion. The reach of mobile phones and e-KYC has ensured these accounts are accessible to those who have been included in the financial services milieu.

In rural sector mostly people rely on local lenders to meet their financial needs. So to penetrate the unbanked areas regulatory authorities and government has ensured flow of credit to productive sectors and banking services to all eligible in the country.

With the integration of traditional banking and digital access, the reach of financial services in the dispersed areas is made possible. Branch correspondent framework played pivotal role towards enhancing access to banking services. With all these measures, the number of banking outlets in villages has gone up significantly. Financial inclusion is becoming a focus area for banks, NBFCs, Financial Technology (FinTechs) and other financial entities. Small Finance Banks have also been set up to further financial inclusion with a client base comprising mainly of migrant labour workforce, low income households, small businesses and other unorganized sector entities. Today, when it comes to financial inclusion and microfinance, there are several channels such as universal banks, small finance banks, micro finance institutions, BCs, etc. Therefore, as a country that is determined to achieve universal financial inclusion at affordable cost, this is a defining moment, and we should seize the opportunity to be marked specifically among others in the world. A co-origination model, which enables the scheduled commercial banks (excluding Regional Rural Banks and Small Finance Banks) to co-originate loans with the non-deposit taking systemically important NBFCs has also been rolled out for credit delivery to the priority sector- booster for lending to micro enterprises, small and marginal farmers, Self Help Groups (SHGs), etc.

Reserve Bank of India has also opined to all SCBs (excluding Regional Rural Banks and Small Finance Banks) that credit by them to registered NBFCs(other than MFIs) for on-lending will be classified as priority sector subject to certain conditions. RBI has adopted a planned and structured approach to address the issues of financial inclusion by focusing both the supply and demand side. With the growing formalization of financial services, focus is on enhancing capabilities so that individuals in the low income groups are in a position to not merely avail the offered services, but are also capable of demanding preferred products and services suitable to their needs / choices. MUDRA has also set an example to lift many beneficiaries out of the poverty although it is not only the financial assistance but banks should focus to lower down the growing bad loans.

Microfinance Institutions are adding to the growth of the economy and also the counts are expanding into newer territories for reducing their concentration risk. According to The Bharat Microfinance Report 2019 prepared by Sa-Dhan, MFIs operate in 29 States, 5 Union Territories and 570 districts in India. Tailored products for providing credit to those without a credit score, entrepreneurial and consumption credit, handholding, financial literacy, social occasion credits and insurance (life and non-life), are all waiting to be tapped in scale and size. Limited forays have been made but are yet to achieve their full potential. The National Strategy for Financial Inclusion (NSFI) 2019-24 has been framed by RBI. It gives the vision to make financial services available, accessible, and affordable to all citizens in a safe and transparent manner to support inclusive and resilient multi-stakeholder led growth.

The potential of microfinance is immense and will ease the track to achieve the objectives of financial inclusion. A major demographic change is taking place in our country with a huge and growing working population. There is a big chunk aspiring to grow into the middle class with the support of institutional credit. Therefore, microfinance can play a big role in building the economy towards uphill.

In today’s world, technology is framing the future of finance. All the key players are harnessing technology to provide an efficient experience to the end user. In the Indian scenario, improving the accessibility of financial platforms using FinTech is the key to grow. Therefore, suitable financial products that caters to specific needs of the financially excluded population, and provides digital on-boarding, is vital in achieving the objective of financial inclusion. Synergy between the mainstream financial entities and other players like MFIs, FinTech etc will lead to the goal of financial inclusion and each will play a complementary role in reaching the heights. Therefore, banks and NBFCs need to explore the possibility of establishing business collaboration among themselves, and with FinTech firms as it could be pivotal in accelerating the agenda of financial inclusion through innovation. In addition to incorporating emerging technology faster into their businesses, the entities engaged in microfinance could also look at collaborating with FinTechs and other entities who can help them mine customer and transaction data, cross-sell products and introduce new customer-centric products and services, and streamline operations. They will also have the opportunity and need to raise the digital literacy of their customers that is not highly informed and aware and, therefore, can be susceptible to frauds. In microfinance, a lot of formal and informal data is becoming available in the form of digital footprints by low income customers who also transact on e-commerce platforms and use the internet. These digital footprints are being used by leading banks and online lending firms to lend to individuals and micro and small enterprises. Artificial intelligence (AI) and machine learning are also finding greater application in the Indian banking and financial services industry.

The implementation of GST has also transformed informal economy to formal one in a significant way and dependence on informal sources of funds has reduced drastically. The proportional increase of dependence on formal sources of funds will decrease the cost of credit for the micro and small enterprises significantly and there will be shift from collateral based to cash flow based.

The microfinance sector is undergoing a multitude of changes amidst growing competition, rising expectations of masses, technological advancements and an evolving regulatory landscape. The sector is, therefore, expected to widen the horizon beyond micro credit to transform the livelihoods of the borrowers. Being constantly mindful of the technological transformation in the banking and financial services industry, the sector must continue to pursue the adoption of innovative, futuristic and high-impact business models. The focus of the sector must be on Digital Microfinance. The Microfinance institutions must broaden their client outreach to reduce concentration risk and to serve a wider clientele base. We must be cognizant of the vulnerability of the sector to factors such as external developments, technological changes, event risks and income inconsistencies of the borrowers. The growing use of technology would give rise to operational risks and there would be concerns related to client data protection which would need to be addressed. Critical review to be carried so that some of the areas do not remain underserved.

Banks, NBFCs and financial institutions are well placed to innovate in cutting-edge technologies be it AI, machine learning, blockchain etc. SIDBI could handhold the micro finance providers in this process, specifically with regard to lending to the micro and small enterprises, in areas such as alternate credit scoring methods, predicting probability of default, etc. With fast changing technology, SIDBI could also take the lead in hosting an ecosystem, within a well-defined regulatory sandbox, to create an infrastructure, which will reduce the turnaround time and provide customer-centric products with robust risk mitigation. This could also act as a crucible to test cutting-edge products for micro-entrepreneurs and a vehicle to provide feedback to regulators.

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