Micro Finance in India: How it Has Evolved over the Years?

It all began when the economist cum professor Muhammed Yunus from Bangladesh began making small loans to poor families in neighboring villages in an effort to break their cycle of poverty during the countrywide famine of the 1970s. His loans were successful in elevating the poor families, and he received timely repayment. Unsuccessful in further self-financing the expansion of this project, he sought governmental assistance. This lead to the foundation of the Grameen bank. Mr. Yunush also received the Nobel Peace Prize in 2006.

Microfinance Industry in Present Day India

Crippling poverty is a characteristic trait of the modern Indian economy. Both the central government and state government-run multiple poverty alleviation programs. The microfinance sector has seen sustained growth over the past few decades. What we see as a vibrant industry empowering a variety of business models today, had humble beginnings. Today, Microfinance allows the provision of financial services to low-income clients or solidarity lending groups, including consumers and the self-employed, who lack convenient access to banking and related services. It not only helped out in eradicating poverty but also improving the standard of living. All Microfinance Institutions (MFIs) today either function as an NGO registered under societies or trusts, Section 25 companies and Non-Banking Financial Companies (NBFCs).

Despite the thriving growth rate, the Microfinance sector is marred by numerous ills in its functioning.

• A large section of the population is still unbanked
• Grey areas in regulations
• Ambiguous pricing models
• Insufficient funds
• Cluster formation
• Over-indebtedness
• Higher interest rates
• Financial Illiteracy of People

Microfinance Tomorrow

Microfinance is a unique economic development tool that was introduced with an objective to assist low-income strata who aim to work their way out of poverty. India today is underway a major policy objective shift towards financial inclusivity. Thus, Microfinance has taken centre stage for extending financial services to unbanked and underbanked sections of the Indian population. This is why microfinance institutions serve as a better supplement to banks. Not only do they serve microcredit but also help the poor with allied financial services like savings, insurance, remittance and non-financial services like individual counseling, training, and support to start their own business in accessible ways. What works in favour of borrowers is that all these services can be availed right at their doorstep, and borrowers are at liberty to choose their own repayment schedule.

Here are a few recommendations to improve the way the Microfinance sector functions in the future:

1. Proper Regulations: 

Unscrupulous ways of lending followed by some MFIs call for greater scrutiny and need for still stricter regulation. With the introduction of innovative operational models, regulations have become a necessity. Given the high growth trajectory of MFIs, it’s important to have a regulatory environment that not only protects the interest of stakeholders as well as promotes further growth.

2. Field Supervision:

Field visits are an optimum way of monitoring the conditions on the ground. These ensure a strict check on the performance of the ground staff of various MFIs and their recovery practices and timely initiation of corrective action if needed. Field supervision also encourages MFIs to abide by proper code of conduct and work in the most efficient way possible. The sector as a whole needs to work out the problem of feasibility and cost involved in physical monitoring of this vast sector.

3. Encourage Rural Penetration:

Hoping to reduce the initial cost of operations, MFIs are interested in opening their branches in places which already have fully operational MFIs. There is a need to encourage MFIs for opening new branches in areas of low financial penetration by providing financial assistance and subsidies. This is a proven way to increase the outreach of microfinance in the state.

4. Complete Range of Products: 

MFIs are renowned for offering a range of products including credit, savings, remittances, financial advice and also non-financial services like training and support. Playing the role of a substitute to banks in areas where people are financially illiterate and severely underbanked, MFIs need to offer a complete range of products to help the poor break the cycle of poverty.

5. Transparency of Interest Rates:

Different MFIs employ different patterns of interest rates and additional charges like interest-free deposits. This boils down to confusion about pricing in the poor borrowers. It also renders the borrower incompetent in terms of bargaining power. It is recommended that uniform interest rates be charged by all MFI players in the market, which would give the beneficiary the freedom to compare different financial products before buying.

6. Bring in Technology to Reduce Operating Costs:

It is for the best if MFIs leverage technologies and IT tools to reduce their operating costs. NBFCs are adopting such cost-cutting measures in a widespread way. Not only do automation tools lead to a low cost per unit of money lent (9%-10%) but also make loan origination processes more transparent and efficient for the borrower’s perspective. Finezza is one such lending management software tool that leads to a complete overhaul of the loan disbursement process of NBFCs leading to cost-effectiveness and brings home higher returns.

7. Alternative sources of Fund: 

With restricted funding, the growth and outreach of MFIs remain limited. In the absence of investment by outside investors, MFIs are severely limited to what they can borrow to a multiple of total profits and equity investment. In order to grow,  MFIs need to raise their Equity through outside investors. The only way to overcome this problem is that MFIs should look for other sources for funding in their loan portfolio. MFIs always have an option to opt for conversion into a for-profit company,i.e. an NBFC.

Along with the change in status, the MFI should also develop a strong board, a quality management information system (MIS) and obtain a credit rating to attract potential investors. If a financial institution purchases the rights to future payment stream from a set of outstanding loans granted by MFIs, it is called portfolio buyout and can be a good alternative source of funding for MFIs.

8. Ensuring High Repayment Rates for MFIs with Mobile Banking Platforms:

While all MFIs emphasize on achieving high repayment rates, the process demands massive manpower on-field. Manual intervention further makes the process slow and inefficient. Given the circumstances, technology is transforming the industry radically by increasing outreach. Followed by demonetization in India, the trend of cashless payments systems is on the upsurge in rural India. What’s interesting is that India is home to more than 1 billion mobile subscribers, and there is immense scope to capitalize on it.

Conclusion

In the end, it would be simple to conclude that the most impactful influences that changed the way microfinance industry functions in India is the rapid rate of digitisations. Automotive lending management solutions and other software tools not only speed up the way microfinance is executed, but also leverage the internet penetration in the rural areas.

Finezza is one such tool that streamlines the process of loan origination and evaluation and adds to the functionalities of the lending platform. Not only does it enhance the overall user experience for the borrower, but it also makes the process simpler for the lending partner as well.

The unique 360-degree lending management solution allows microfinance lenders to access the huge untapped sector of the Indian economy without any need for manual intervention, excessive paper load and massive wait times.

To know more about Finezza, get in touch with us!