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’.