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MicroFinance - Yesterday, Today and Tomorrow

Updated On : September 2017

"Micro credit is not charity. This is business: business with a social objective, which is to help people get out of poverty." Muhammad Yunus - Founder of Grameen Bank and Nobel Peace Prize recipient. The Grameen bank model and its subsequent success gave a fillip to micro credit at global level.

Microfinance in India has transformed through different phases. In its earliest form, the loans were backed by Pigmy deposits collections-pioneered by Syndicate Bank.. Later, it had new mask, in the form of government sponsored directed lending programs IRDP, 20 point program. The success was very limited and sparse.

The next in line of defence to micro credit came from by NBFCs and NGOs. The Business Correspondent model gave fresh blood to the under nourished rural credit. Here again the high rates of interest and muscle flexing tactics for recovery made the model unpopular. After the Andhra Pradesh crisis, the government of India chose to issue certain regulatory controls. The industry recovered from the problems and the portfolio as of March 31 2016 reached 53,332 crores.

The primary challenges that the Microfinance industry faces today are:

  • Identity and authenticity.
  • Multiple financing within the system.
  • Digital literacy of the clients.
  • Trust deficit in agents under manual system.
  • Usurious lending rates-"Killing the goose that lays golden eggs".
  • Business oriented, rather than service as a business model.

Currently the industry is on the cusp of explosive growth and needs a relook at their business process mechanism. The automation and mechanisation deployed needs to be analysed and changes need to be introduced that will enable performing tasks more efficiently and effectively. The industry may choose to drive on the electronic and network highway, that is being laid across the country. There has been a lot of churning in the ecosystem required for microfinance. Here are a few highlights:

  • Aadhaar has become the foundation for KYC.
  • 2,50,000 village Panchayats would be covered under the National Optical Fibre Network.
  • 2,50,000 gram panchayats will have Common Service Centre (CSC) each.
  • CSCs can act as business correspondents for banks to deliver their products and services.
  • One of the main agenda of CSC is to spread digital literacy in their gram panchayat.
  • E-wallets and mobile payment systems have gained momentum post demonetisation.
  • Mobile phones have become ubiquitous and the users are in a buyer's market.
  • Telecom Service providers are vying with each other for market share and are offering services at jaw dropping rates.
  • Rural Banking infrastructure made more robust with licenses for small banks and payment banks.
  • Regulations are being put in place to check the interest rates in relation to cost of funds.

Most of the nagging problems of Microfinance industry can be addressed using the technology infrastructure that is being woven. The time is ripe to go digital in full force, to not only sustain the industry but also to thrive. Still millions are not in a position to get the required credit.

Is microcredit a vaccine or antibiotic?

A disease can be treated with a vaccine or antibiotics. Credit constraints in India are not at an epidemic level to administer a blanket vaccine to all, like in some of the underdeveloped countries where an entire section is deprived of credit and growth. Indian rural diaspora requires dosages of microcredit on need to do basis. The fabric of the problem could be different for different locations.

Major financial inclusion drive, network revolution, telecom service, mobile banking and e-wallets bode well for the future of the Microfinance industry.

The story of Microfinance in India is neither finished nor free from challenges and uncertainties going forward. The long awaited political and regulatory backing has handed the sector a high-quality pen to write the next chapter with.

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