Microfinance has been a tool of change for years, particularly for rural women, who are the primary recipients of micro-loans, but it is not just a tool to alleviate poverty. For years, microfinance has been a catalyst towards individual development and has registered a noticeable growth towards promoting entrepreneurial activities in poor, and primarily rural, areas. Microfinance has been an agent of socio-economic change for the last few years, helping not just to rejuvenate rural communities but also to break social barriers by reaching lower castes.

While, for decades, the formal banking channels have not been able to meet the credit needs of the poor, the growth of MFIs has helped in successfully scaling up of the rural economy by preventing exploitation of the rural poor from money lenders, who called the shots for almost three centuries. MFIs have not only opened up the rural credit sector but also helped in substantially increasing the ambit of employment and poverty eradication. Whatever shortfalls the formal banking channels had come across in the financial inclusion of a large section of the populace, MFIs have mitigated that in terms of their services to the poor.

Sa-Dhan, the self-regulatory organization of MFIs, noted that MFIs have been successful in bringing together microfinance and livelihood in order to provide a better life for their clients, most of who come from rural areas of the country. Going through operational models in states like West Bengal and Odisha, Sa-Dhan noted that even extremely poor people, including traditional artisans and agricultural workers, who hardly had a say in the rural economy, did not just have access to MFI loans but also productively use these loans in a manner that provide livelihood to people other than only their family members.

In one of its recent reports, the ADBI found that microfinance “effectively generates employment and sustains the income of the rural households by giving them often opportunity of work”. Even though both Sa-Dhan and the ADBI found that efforts need to be extended further in order to extend microfinance services, MFIs have already emerged as the right platform to optimize credit needs and help the rural poor in their fight against poverty.

The success of microfinance in India, a proven fact over the last few years, clearly reveals the viability of the business model followed across the country. Additionally it also has the ability to reach out to a large percentage of the populace that has remained out of the purview of formal banking channels for decades. The importance of MFIs, working in tandem with banks, as an important conduit towards providing financial services to ‘unbanked’ millions, is reflected in a concept note from Sa-Dhan, the self-regulatory organization of MFIs.
Sa-Dhan finds that, if more than 22 lakh clients from self help groups are linked by credit to banks under the SHG-bank linkage programme, an additional 1 crore clients receive service through MFIs. This goes to show that not only has microfinance seen unprecedented growth over the last few years, the sector has securely established itself as a significant contributor to the government’s agenda of ‘financial inclusion’. Moreover, this sector can go a long way to pursue the government’s agenda of a cashless economy, thus, not only empowering people from far-flung parts of the country but also creating a significant social impact.
With microfinance in India standing at a crucial juncture, a 2016 report from the Asian Development Bank’s think tank, ADBI, finds that the country’s financial inclusion is undergoing a tectonic shift, with the focus being more on finance services instead of on credit. Under these changing circumstances, it is only natural that MFIs, which mostly serve low-income households through their women members, will go a long way in extending their agenda of including more and more people into the financial mainstream.
Moreover, for a country like India, where around 26 percent of the population lives below the poverty line, MFIs have come across as an alternative for the rural poor to get out of the clutches of loan sharks. In this context, it is significant to mention that unlike commercial banks, where large scale defaulting has become a crisis, in microfinance, the default rate is found to be less than 10 percent.

It is important that the banking system understands how to provide microfinance without making it look like something short of charity. Not only has microfinance proved it is viable as a business model, it has also shown its capacity to reach out to those who need to be brought into the financial mainstream. But for MFIs it has become clear that for microfinance to penetrate further into the rural population, who has hardly any access to banks, one of the key factors behind its success is the ability to go around traditional tools like credit history checks and need for collateral for the former banking network.

MFIs traditionally provide loans to women from rural areas, who barely have any collateral to offer and often do not even have proper identity documentation. In such a scenario formalities would have prevented MFIs from running their vast network of loan-seekers. Hence, such tools when it comes to microfinance loans has been proven unnecessary over the years. The fact has further been validated by the high repayment volume from its debtors.

Since, MFI loans are usually small amounts provided to women with an entrepreneurial streak, they will continue to remain a crucial channel of providing financial services to a large section of the population, acting in complement to banks. Although, for banks, a microfinance customer seems inherently vulnerable, it is imperative to understand that MFIs have plans for risks, without slowing down the access to regulated credit lines for those who have remained underserved by formal banking channels.

While MFIs have worked on strengthening their position of viability and legitimacy in places where banks are not present, the need of the hour is to further strengthen credit discipline and culture of repayment among its customers. The system can be made more durable by optimizing on operational costs through IT-enabled services, more stringent self-regulatory norms for stakeholders in the sector, and by safeguarding the business model from what can be loosely termed as ‘acts of God’.

The fact that the country’s financial scene has changed since November 2016 is plain for all to see, since the government demonetized two high denomination notes and has been working on a digital India.
With the focus more on cashless economy, MFIs, which have access to the bottom of the economic pyramid much more than the formal banking sector, have a major role to play in pushing the government’s agenda of minimizing the use of paper currency and bring about more transparency through digital transfers and transactions.
A World Bank survey reveals that while slightly over 50 percent Indians had bank accounts in 2014, only about 12 percent had any sort of cashless transaction since last November. Experts believe that these idle bank accounts can be turned active and individuals can be encouraged to indulge in cashless transactions if it can be ensured that all sorts of payments are directly made into bank accounts, and not just returns on subsidies and other payments from the government. While over the years, India’s approach to financial inclusion mostly meant providing access to bank accounts for people in distant parts of the country, just doing that will not serve the purpose. Several experts have admitted that a cashless economy, backed by a stable digital infrastructure, could be the answer to increased financial inclusion in India.
Microfinance, which has played a remarkable role towards financial inclusion of people living outside the purview of formal banking channels, is a sector that has the potential to create significant impact and empowerment by pursuing the government’s cashless agenda, which will also work towards helping the other goal of financial inclusion.
While the cost of providing services to ‘unbanked’ millions continue to present a challenge even for MFIs, the ‘last mile access’ to financial services is undergoing a major change in India due to with digital technologies in play. If the trinity of Jan Dhan, Aadhaar card and mobile phones has created an ecosystem to empower people in rural areas, a variety of digital payment platforms, both government and private, have made it imaginable to have nearly 5 crore users receive and repay loans through bank accounts, leading to what could be more than 100 million cashless transactions every month.

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