Kuldip Maity

Inclusive finance and inclusive growth are not really cousins but are siblings or perhaps more appropriately twins. Or technically speaking, inclusive finance is a necessary condition for inclusive growth. Let us look at the relationship a little more closely to clarify where we are coming from. To do that let us first see the way both are described. While inclusive growth is described as economic growth that is distributed fairly across society and creates opportunities for all,inclusive finance subsumes financial literacy and ease of access to finance.

Our position here is that inclusive growth cannot be realised without inclusive finance. Let us therefore take the description of inclusive growth first. Growth in the macro economic sense can happen without there being an equitable distribution of its fruits. Growth is nothing but a rise in the gross domestic product. In an economy where access to resources (largely understood as financial resource) is restricted to a few will necessarily lead to the growth of prosperity in a disproportionate way for the few who have easy access to resources. Those who are denied an easy access will depend on those few for their relative growth in prosperity on the willingness of the ones who have privileged access to resources to share their riches with others be that in the form of employment and a fair wage or in some other form.

In an economy where nobody is barred from investing in lawful avenues and benefiting from its returns, it goes without saying that those who have more will have greater opportunities to exploit than those who, their enterprise capability notwithstanding, have limited or no access to financial resources. It is also given that those who have more will tend to invest more in technology dependent industries as it returns higher productivity thereby restricting employment creation. And whatever employment is created through such investments tends to stay restricted in a privileged educated section. Therefore a growth in this segment adds to the growth in gross domestic product without much of a distributive effect.

Inclusive growth, on the other hand, needs a fair distribution of fruits of growth and creation of opportunities for all. This can only happen through the creation of labour intensive units creating direct and indirect employment. This can only happen if those who are starved of access to funding are provided with funding opportunity. The issue here goes a step forward. Those who have limited access to finance also lacks proper awareness to productively deploy the resource. Therefore creation of access to fund is necessary but not sufficient. What more is needed is a system to create awareness about the available avenues of funds and how best to manage their deployment. However, an informal approach towards this is not enough. It requires a structured institutional set-up like microfinance in its various avatars to directly intervene in the process – both as provider of funds and as partner in the process of imparting financial literacy. A local enterprise given easy access to funds acts both as a direct employment creator locally and by creating local prosperity also helps distribute the fruits of growth fairly.

A rise in the gross domestic product may not necessarily lead to a process of inclusive growth. For the growth to tickle down there is also the need to create economic gravitas at the base of the pyramid which can only be done through inclusive finance as an engine to create entrepreneurial capacity at the base as well.

As in the case with a business organisation, much of the problem of human civilization can perhaps be traced to the graduated dawning of awareness and the consequent understanding of required fine-tuning. In a generic sense the problem can be spelt out as the gap between the ‘what’ and ‘how’. The progress of civilization is the development from a specific state of ‘what’ through a process of ‘how’ that gets generated through a process of developing awareness of faults in the process. A process that flows from the ‘what’ as a destination. The awareness in this dynamics is a compulsion as the gaps in the process of ‘how’ creates at times irretrievable losses that force actors to be aware or create a process of awareness to generate a better ‘how’.

An ideal case in point that affects every single individual on this earth is the issue of ‘sustainable development’. By 1987, it had become clear that the way we were using the nature (how) to generate development (what) would in the ultimate analysis destroy not only what we were aspiring for but would also obliterate the entire human species.

So in 1987, the United Nations General Assembly, realising the compulsion of involving every single nation in saving the earth for us, appointed a commission under Gro Harlem Brundtland, the then former Prime Minister of Norway. The Brundtland Commission defined the target of saving the planet (what) as “development that meets the needs of the present without compromising the ability of the future generation to meet their own need.”

This was easily said than done. Take for example the issue of energy use. The developed nations at any point of time consume more fossil fuel – a non-replenishable source of energy and creator of carbon footprint – and developing nations in their quest for development need the use of more and more of the same energy source creating increasingly greater carbon footprint with its consequent impact on the depletion of nature. Similar is the case of mowing down of trees and denuding forest cover to create space for human habitation and squeezing space for other species destroying ecological balance and environment. The quest of civilization for better living thus created the killing field of our very being.

However, initially it was thought to be addressable through a top down approach with policy diktats that sought to limit the use of nature in a manner that failed to address the aspiration for prosperity of the poor. Fossil fuel, urban land and such other things required for our living were unaffordable for the poor. They needed to cut down trees for energy needs and clear land for living. So while the definition (what) was perfect the process (how) defeated the goal.

What was needed was awareness. Awareness about the need to protect the nature irrespective of the economic station of the addressees was the need of the aware as was the need for poverty alleviation steps that were in sync with the Brundtland goal. With this awareness it was realised that empowerment through education (new how) was the fulcrum to leverage nature in a sustainable way so that we do not compromise the requirement of the future generation thereby stopping the annihilation of human species.

One doesn’t play with fire as it injures and even kills and the loss is immediately understood. That’s experiential -- both received because we are taught about the consequence from childhood and may also have personally experienced the pain. But for experience to tell us how nature retaliates would take us generations and might happen when we are at a point of no return. This realisation has led the nations across the globe to scamper towards bottom up approach from top down and focus on education and empowerment. For education creates awareness of things we might not directly experience and also empowers people to fight poverty that together lead to sustainable development by meeting “the needs of the present without compromising the ability of the future generation to meet their own need.”

There is no free lunch in this world. Even in charities there are costs. And then we all know that we tend not to appreciate a freebie as much as we would have had we been made to bear the cost.

Traditionally we are not used to thinking that social welfare may not be in conflict with a profit seeking operation. And someone believing that to a point of obsession may not be entirely faulted either. The instances of society feeling challenged by the operations of a specific company’s operations are far too many to be just wished off. But the guilt of a few cannot be held as evidence of crime against all corporates. Unfortunately, however, logic and evidence notwithstanding, the inclination to think to the contrary is far too strong in the minds of the people for the logic to win.

In the case of operations focused on finance the feeling is even more entrenched – specially in the cases of the companies operating in the rural areas. In this specific instance, public perception has been colored by the operations of unscrupulous money-lenders who have traditionally and for ages held the hapless poor in their ruthless clutches.

And this perception has indeed not been a particularly easy thing to contend with for microfinance operations. Microfinance was introduced and specific rules framed for their operations for the purpose of rural development with a focus on alleviation of poverty. The goal here is to create enterprise capacity at the grassroots levels at a sustainable level so that through creation of direct and indirect employment, the country gets to address the plague of poverty without direct intervention from the government agencies.

The premise on the basis of which the whole concept took off was the belief that the poor are the greatest entrepreneurs. It’s argued that the way the poor fight to survive every day of their life needs a great degree of innovativeness. Without the innovativeness the uncertainty of procuring the necessities of life on a daily basis cannot be met. A business operation is also about meeting challenges to survive, sustain and grow.

The premise that flowed from it was that circumstances make the poor to face challenges innovatively on a daily basis. Given the fact that they are used to the basis requirement of entrepreneurship, the remaining components for turning them into business persons are access to finance and training them into putting the funds accessed into productive use. They may require to be provided with literacy specific to their needs.

The trick was to innovate a structure that would be a one-stop shop for a) easy access to finance, b) monitoring the use of funds lent out, c) facilitating expansion of knowledge capacity at the grassroots, d) empowerment in its broadest sense of the term.

Experiments with delivering on these requirements through a multitude of agencies – regional rural banks, rural banks, cooperative banks, literacy missions, except for the last, all operating on cost plus basis – having failed to deliver the desired results, the microfinance model was pushed. The equation was simple. A cost plus model of delivery will not strain the government coffer and as a consequence the taxpayers’ purse and it will be a win win situation. The model that has evolved makes it, from the pure business point of view, a compulsion for the microfinance units to ensure that their customers productively use the borrowed funds. If they don’t they won’t be able to pay back and microfinance units would run up NPAs. So the system itself has built-in efficiency driver and deliverables need to be ensured to avoid closure.

“There is no free lunch” model therefore is not only win win, it’s also a sustainable model to create a solution to fight the curse of poverty. It’s here therefore like any many other properly crafted business policy environment profitability and social welfare shake hands.

There is a need and there is a compulsion. When it comes to the rural economy the compulsion is to survive and when it comes to the need, the rural economy needs access to fund. If we look at the report of the KPMG (January, 2018) the riddle stares at our face so starkly that the situation goes beyond dire.

The fact that even an astute student of finance tends to ignore is the extreme disparity between the access to finance of the urban and rural economies. Weighted against the contribution to GDP the rural economy has a disproportionately low access to lendable funds compared to the urban economy.

According to a KPMG report (January, 2018) rural India contributes 47 per cent to the GDP, while has a 10 per cent loan outstanding against Urban India’s figures of 53 per cent and 90 per cent respectively.

The paragraph above clearly brings to the fore the contradiction between the need and the access deficit to funds. One may wonder as to the feasibility of the statement that microfinance being the backbone of rural economy.

Though it’s true that the rural economy has a severe access deficit to organized sector fund, the segment wise distribution of fund supply clearly tilts the balance in favor of microfinance being the major source.

A study in the same survey mentioned at the beginning of this blog about the sources and their weightage in terms of North Eastern India’s self help groups’ sourcing of funds clearly points to the dependence of them on the microfinance industry. As a source of fund to them the microfinance industry accounts for an overwhelming 71 per cent, followed by regional rural banks at 13 per cent, commercial banks at 11 per cent and cooperative banks at a measly five per cent.

This clearly points to the fact that even within the gamut of availability it’s the microfinance that holds the sway. And there is a reason for that. If we seek the reason why the microfinance holds such an overwhelming weight as a source of fund for the self help groups the answer will be simple if we look at the way the industry operates.

Unlike the banks or similar institutions, the microfinance industry is an interventionist source of fund. If we look at the way the microfinance industry functions we will find them holding the hands of their customers, teaching them best use of funds as investments, structuring the business – in short, an active driver of financial literacy. In fact, the performance of a microfinance company is not measured just by their financials but also by their success in helping their clients in graduating into better economic station in life.

The ethos of microfinance lies in direct intervention at the grassroots for poverty alleviation through creation of easy access to funds to the cohort that cannot provide conventional collateral for obtaining loans from banks or similar institutions. Having provided the fund, the microfinance companies are tasked with ensuring the loan provided is put to profitable use so that the clients can repay the loans from their earning surplus. And then in the subsequent cycles they are solvent enough to expand their earning source from further loans.

Microfinance by creating enterprise capacity thus at the grassroots turns itself as the backbone of the rural economy, or more appropriately the backbone for sustainable development efforts.

Anguthhachaap. This term has over a period of time become synonymous with illiteracy. In the Hindi movies of those eras when nobody could even think that the Bombay filmdom would one day be referred to as Bollywood – an aspirational cloning of Hollywood – it was almost a regulation scene in which a jamindaar or a money lender would be shown forcing a person put his thumb impression on a deed that would someway lead to the slavery of the entire family of the unsuspecting poor illiterate man.

That what was an ink impression has in the digital age turned into an important tool to authenticate a person’s identity beyond reasonable doubt. In those days one needed an expert to match fingerprints and certify the authenticity. In these digital days, it just takes a few seconds to check the same with the person concerned putting his thumbs on a scanner that can be carried in a pocket.

Fitted to a smart phone and connected to a database thumb impression therefore is not just about a tool to allow an illiterate person to authenticate a transaction. It has moved beyond that into a realm that minimizes frauds with the help of biometrically authenticating a person’s identity.

This has had a far-reaching consequence for financial inclusion. For long illiteracy had stood as a roadblock to getting the citizenry bar none into organized financial market. There was also the problem of reaching out into a remote village with a traditional financial institutional branch. To validate every transaction that was done with thumb impression needed a trained personnel which of course was a challenge.

With the evolution of digital technology the whole task of authentication can now be done by anybody. All that it requires is a net connection, a smart phone and a small thumb scanner. All of these can be carried in a pocket. The net would connect the phone to a database storing thumb impressions. All that a financial representative would need to do is to scan a client’s thumb and transmit that to the database concerned through the phone and the job is done. Aadhar is meant to do just that. Help biometrically establish the authenticity of a person’s identity.

The point to note here is that the digital age has brought in a sea change in the facilities available to the financial sector. Specially the micro finance industry that works at the grassroots with customers many of whom may not have conventional documents or facilities to authenticate their identities got spared the pain of leaving perennially outside the boundary of the organized financial market. With biometry they are spared the crisis of identity as it were. Anguthhachaap is no longer synonymous to illiteracy.On the contrary, it stands for empowerment.

When the Gods needed to destroy the Mahishasura, they invoked a female power in the form Devi Durga.

In the entire history of civilization, almost without exception, the mightiest power has always been reposed in a female God. Take the example of Athena, the Greek Goddess. She is the Goddess of wisdom, courage, inspiration, civilization, law and justice, strategic warfare, mathematics, strength, strategy, the arts crafts and skill.

Strangely, if we, for a moment, pause to think about MaaDurga we find the deification of the same traits in the form of herself, her daughters MaaLakhshmi and MaaSaraswati. While she as the mighty warrior kills the invincible to save the world from doom, her children, specially the Goddess of prosperity and the Goddess of knowledge, keeps the world edified and in order through wisdom.

If we start connecting the dots without any bias we would find that all the evolved civilisations reposed their faith in the female power. The modern day science has also traced a reason for it. Studies conducted across various activities have returned results showing women have empirically done better than men in stabilizing a challenging situation or in times of crisis, by individual performance, women have shown to have better abilities coming out as a winner due to their endocrinilogical endowments.

Closer home we have ample examples of women challenging the notion of a mediocre nation. Remember Karman Malleswari who won an Olympic medal in 2000 Sydney Olympics -- a 100 year after Norman Pritchard won two medals in 1900 Paris Olympics. With Mary Kom, Phogot sisters, Hima Das, Deepa Karmakar, Deepika Kumari and others in the sports and in other fields proving every other moment their resilience and superiority.

In the case of development narrative we find the same stories getting repeated. In poverty alleviation therefore it has been a conscious decision to leverage the resilience, grit and enterprise of women in fight against poverty. The understanding here is that women look after the family even in the hardest of the adverse situation and keep it ticking. It takes a great deal of enterprise to survive in the face of great adversaries. If that be so, a little handholding would go a long way in creating a new India. This basic understanding and its implementation through microfinance has started bearing fruits specially given the priority the government has put on creation of women SHGs, and JLGs and also facilitating their funding by creation of the MUDRA.

While sports women like Deepika, Phogot sisters, Hima and Jhulon have shown that they are the flag bearers of the new India, a silent revolution is also happening in the hands of their sisters at the grassroot level. The Durgas of the new India are out there to annihilate the curse of poverty. It’s only a matter of time before the transformation becomes palpable.

On this note let me wish you all with Season’s greetings.

When the conventional wisdom shouts and tells us that traditionally a village economy is change resistant it doesn’t spell out one important assumption embedded in it – the village economy lacks connectivity and empowerment to change. The same assumption also got seeped into the making of policies to develop the rural economy. Let us for example take the case of education. Prof Amartya Sen while commenting on the Indian development connundrum repeatedly pointed out the fact that the Indian policy makers always assumed that the village poor needed to be trained in trade so that they could be self-sufficient. While countries like China and the then USSR focused on general education at the basic level, India’s policy focus treaded a different course thereby restricting the provision of choice and options to the rural human capital.

With changes inititated in the nineties that gradually opened the economy and rising connectivity both physical and otherwise things started to change in the rural economy as well. The rural folks long understood as change resisitant started to challenge the conventional wisdom. Youngsters started to migrate out of the villages into city and when they returned they validated the changes blowing across the country.

Among changes that would go down the history as an important one was the emergence of the microfinance industry. From the day India won its freedom the aim of the nation was to get rid of poverty and tread the path of self reliance. However initiation of the transition of the concept from the macro to micro wasn’t an easy traverse. With the burgeoning microfinance industry the road towards self sufficiency has started moving towards a new horizon by creating micro enterprise and generating employment chains along the way.

One must remember that employment as an outcome directly related to microfinance is not yet available at the macro level and support to the claim being made here is mostly experiential. Our experience tells us that every micro business has a considerable employment generation impact. Take for example the case of goat rearing. In the villages a goat rearing unit can be set up with little capital. Some goats can be made to kid twice in 18 months. They are not difficult to keep and can be reared to yield various benefits.

Our case study shows that funding a goat rearing unit would soon lead to creation of jobs as gothard for more that two persons. A simple back of the envelope calculation shows that just by funding a family to rear goats would not only leverage it off poverty but would also create earning capacity of two more persons at the least and would thereby create support for two more families. And we are talking about creation of an indirect employment chain.

There are similar examples from other trades as well but to understand the impact that the industry is maing towards the cause of poverty alleviation let us extend the goat rearing example. If there are 100 households in a village, a conservative estimate to understand the magnitude of the spread effect, one support goes on to create sustenance for three families directly – three percent of total cohort in the village. Not only that it creates demands in the local village economy that has a multiplier impact.

It also has a social impact. The connectivity has also made the poor aware of the value of education. With the creation of surplus through boosting micro enterprise the microfinance industry is also creating a social impact with varied but all positive impact. With the creation of surplus and greater awareness gained through microfinance interaction those under such finance umbrella now aspire their children to be educated in schools for general instructions. What Prof Amartya Sen rued as the failure of the policy – a push factor – is now being gained through pull because of financial capacity being created by the microfinance activities.

Let me round up by saying that microfinance activity is creating employment directly and indirectly and also employability in future by directly creating a social impact conducive to boosting aspirations for education.

Eighties provided the Black Swan to the Indian Economy. As the decade drew to a close the most improbable thing happened. For the first time the economic narrative of India changed and the journey from a public sector economy to a market driven economy began.

Why Black Swan? Because, before the discovery of Australia, everybody thought that a swan was white. When Australia was discovered it was seen that there was a black bird that actually resembled a swan. It literally shook a global belief by catching it by the scruff of its neck and forcing a new reality through the gullet of the civilisation. Much later, around 2008, Nassim Nicholas Taleb -- essayist, statistician, trader and many more – coined the term to explain defining trigger for changes in the history of civilisation. And all those changes were higly improbable till the time it happened.

Similarly, till India stepped into the nineties nobody could think that the Indian govenrment would ever withdraw from controlling the economy the way it used to, that the subsidy regime would slowly shrink and the defining role of the government in the alleviation of poverty would take up a totally new hue in the form of spreading the culture of entrepreneurship. Self sufficiency from being a macro concept would metamorphose into ‘to each on his own’ with the government and the private initiative becoming partner in spreading entrepreneurship at the base of the pyramid. It happened because of the huge financial crisis – the Black Swan – that the Indian government faced at the beginning of the nineties and was forced to change its strategy of development through direction and allow the market to take over the direction setting role.

With the liberalisation, microfinance emerged, among others, as an important partner of the government in the task of reshaping the economy. The microfinance industry’s task, over a period of time evolved into that of a facilitator of not only channeling financial capital but also holding the hand of the poor in learning the use of money and thereby becoming self sufficient.

But the process also needed funding institutions that would specialise into providing funds to the microfinance industry in a dedicated way meant for the defined addressees. Lauched on 8th April, 2015, Pradhan Mantri Mudra (Micro Unit Development and Refinance Agency Ltd) Yojana is an attempt towards this end. This scheme aims at channeling upto Rs 10 lakhs per ticket to micro enterprises for manufacturing, processing, trading and services. The defined addressees by gender in the scheme are women who are the focus of the microfinance industry.

There has also been an important develoment that would go a long way to help the microfinance industry. The credit guarantee fund scheme for Stand-up India has also been enhanced from Rs 1 crore to Rs 2 crore extended to NBFCs for collateral free for medium and small enterprises loan.

The data available from the day MUDRA scheme was lauched till 2017 – i.e. the first two years – shows that 7.5 crore loan accounts availed credit exceeding Rs 3.17 lakh crore. Sanctions and lending support made during FY 2017 amounted to Rs 3708.94 crore and Rs 3337.20 crore respectively.

In short, with the new paradigm of poverty alleviation through the creation of micro entrepreneurs, Indian economic dynamics is showing a tremendous resilience and astuteness in generating appropriate institutions in promoting the cause of creating a virtuous cycle of prospertity by challenging the apparently unconquarable vicious cycle of poverty.

When Y V Reddy took over as the Governor of the Reserve Bank of in 2003, by his own admission, he didn’t bring with him the experience of a banker. But a career bureaucrat that he was, he understood the plight of the crores of citizens without any access to formal institutional finance.

By his own admission, when he started reviewing the Indian banking scenario from a customer point of view he realised that there were three things that needed to be taken into account.

A) Ensuring that the depositors money is safe

B) Ensuring an easy and affordable remittance mechanism that required using of appropriate technology.

C) A KYC structure that through periodic monitoring would screen out fraudulent and other illegal transactions.

This was the genesis of the famous financial inclusion proposition articulated in his 2005 monetary policy and set the stage for digital banking.

The now obvious but then scarcely perceived benefit of digital banking was to get around the problem of physical interface between a bank and its customers for transactions. In the rural areas where cash based transactions rule, for a rural labour to approach a bank means sacrificing a day’s earning which is a huge cost to him. Technology based banking reach-out would help cut this cost out.

The frowning of sceptics notwithstanding the digital banking is fast taking root as the affordable internet based mobile connectivity has started penetrating even the remotest of villages in the country.

The main issue here is the ease of transaction on a properly designed digital transaction vis-a-vis the cost of cash based transactions to the system. Cash – be it coin or notes – needs to be guarded against counterfeiting. That itself is expensive. While one can check notes for their veracity, it’s difficult to ensure the same for coins although adequate safeguards exist to deter the fraudsters or attempts to melt them to use the metals for other purpose. Also machines to check the notes in the villages are not easily available. All of us know what we are talking about here. There is also the issue of banks’ refusal to accept coin deposits mainly because of the claimed inconvenience of storing.

On the other hand, digital transaction based on IMPS is instantaneous and convenient for low value transactions and just needs the phone number of the payee.

Expectedly, the entire experience wasn’t encouraging. The app was evolving and affordable mobile internet network penetration was just taking shape.

Going by the RBI data, digital transactions reached a record high of 1.11 billion in January, 2018, up 4.73 per cent from the 1.06 billion in December last year. Total transaction value surged to Rs131.95 trillion compared to Rs125.51 trillion in December, 2017.

UPI enabled transactions crossed 151.7 million mark in January compared to 145.5 million in December, 2017 – a surge of 4 per cent. But the increase in value for the same period has been a mind blowing 18 per cent to Rs155.4 billion.

Over the entire 2017, UPI based transactions grew by a massive 7000 per cent.

This has happened, as I argued, mainly because of affordable mobile internet network penetrating deeper and deeper into the rural India. The higher the spread greater would be the impact of financial inclusion that would in turn benefit the economy enormously.

Coins remain a big issue across the globe when it comes to depositing them in the bank. Here is an incident that I came across recently while surfing the net. Mr Grayson, a blogger, writes about his helplessness while trying to deposit his coins. Over a very long period of time he kept dropping coins into a really big bottle of wine (I leave that to the readers to work out the size of it). He saved a pretty sum. His challenge therefore was what to do with them. The logical option was to deposit them in his account. But he was flabbergasted when the teller told him that coins are not accepted as deposits.

That’s an experience from a first world citizen. And coins in the hands of citizens there are not so much a problem for the economy as it is in India. With a large informal sector driving the economy here where traders and micro business operators survive on small transactions, coins are an important medium of exchange. So much so that the tiny sector thrives on selling products against coins of various denominations going up to a denomination of Rs10. Banks in India however as in the first world are routinely refusing to accept them as deposits.

The main logic that the banks are taking shelter under is that a) it’s difficult to count large number of coins and unlike currency there is no automated mechanism to detect fake. Besides, storage is a big issue in far flung branches. The problem has really turned acute for the informal sector and the financial institutions like the MFIs dealing with them. According to the Coinage Act, one can deposit up to a lakh of rupees in coins in current account. But banks refuse to listen.

The problem is so acute that the Reserve Bank of India had to issue a press note for wide dissemination. The RBI in its 15 February, 2018 press note advised the banks not to refuse coins. The Bank even advised the banks to keep plastic sachets at the counters that could accommodate 100 coins per pack for distribution among depositors.

It said that coins may be remitted to the currency chest as per the existing procedure. The stocks thus built in the chest may be used for the purpose of recirculation. And then came the warning. “Any non-compliance in this regard shall be viewed as violation of instructions issued by the Reserve Bank of India and action, including penal measures as applicable from time to time, may be initiated.”

Despite the intervention, however, things haven’t changed on the ground. Persistent refusal to accept coin deposit by banks is acting as a major roadblock for trade and one hopes that a solution would be found soon.

The economic reality is cleary pointing toward the need for evolving a model based on individual lending alongside the accepted model based on joint liability. The reasons have been laid out in my last blog but for the sake of smooth flow of reading let me reiterate my position as it would be important for my argument in favour of the need to create specialised microfinance bank.

As I have been arguing and pointing out for some time, driven by the market reality there is a clear widening of spectrum of opportunities. When the microfinance movement started, the opportunities were limited and the enterprise windows were not as diverse as they are now. With limited diversity in opportunities for enterprise, the diversity of risk was also limited and understood by everybody. Therefore the group could be easily sold on a business proposal. But with the risk spectrup widening with the days in sync with opening up of new business opportunities, it is turning out to be difficult for an enterprising customer to convince a group on the bearability of the risk associated with his business poroposal. In short, it is the fear of unknown that acts as the strategic barrier to individual aspirations within the conventional joint liability group model. This reality obviously argues in favour of an individual based model, not so much as total replacement to joint liability but as a second model on offer.

But this is not all. Availability of finance needs to walk hand in hand with accumulation of savings. Within the existing microfinance model the industry is working more as an extension of banks rather than as an independent resource generator. Within the existing model, the microfinance industry is working as an extended JLG to the bank as it were. Banks are providing the funds to the industry. The industry is bearing the risk of micro lending.

Now if we just for a fleeting second remember that risk is priced as interest, the existing model tends to multiply risk with the resultant obvious impact on the cost of fund. On the other hand there is the issue of helping the customers save within an institutionalised structure. With the microfinance units not being banks, in order that they may help the customers access the financial market 360o , the units again act as agents of banks or other financial institutions.

The Grameen Bank experience and its success has a lesson for microfinance as a tool for poverty alleviation and development in a country like others. As a bank, the Grameen Bank in Bangladesh and then in the USA could fashion products in a manner that helped people within their locality to leverage local needs as business opportunities. Micro savings provided the funds that in turn got channelised into loan to help fund business plans. The concept helped cut out the intermediation model as it has evolved globally and in India. Grameen Bank was into intermediation but not as agents of other bigger financial institutions. It provided faster response to the local needs in an innovative way paving the way for more fluid development dynamics.

In India, the time has probably come for us to think along similar line and create microfinance banks for a faster traction than what is availble within the current model.

In the last post I argued in favour of the indispensability of handholding and why technology can at best be a facilitator rather than being a total replacement of human intervention in the microfinance segment. This was argued in the perspective of the accepted axiomatic premise of the entire microfinance movement.

Let me start this blog by reiterating the basic tenet of the microfinance movement that is so relevant for my argument in this post. Microfinance movement evolved from the realisation that unless a system evolves that provides resources to create capacity at the level of the needy, the Gordian knot of vicious grip of poverty cannot be sliced. However, as this argument rules out a comprehensive dole based model, the concept of micro loan evolved. One does not need to be reminded that loan requires repayment and risk bearing ability.

The poor do not have any resource other than their enterprise that they are forced to learn from their daily compulsion to survive against odds. This led to the concept of joint liability group. The logic here is that a member takes credit and the risk is borne by the entire group. Further, the group knows the skill of a fellow member and since they jointly and severally bear the risk, they will ensure timely loan repayment and act as risk minimising machinery. And of course enterprise is something that is part of their daily life.

But this concept of joint liability is now decades old. The demands and the opportunities over the time have drastically changed. So have the risks. To illustrate, with the spread of the mobile phone, motor driven two and three wheelers or myriad other accoutrements even in the rural areas, the demand for their maintenance skill has also gone up. But to meet the need for such varied demands also carries with them varied degrees of risk. When the joint liability group was thought of, the market demand spectrum was less varied as it is now. And it was easier for the groups to comprehend their collective risk bearing ability.

In a nutshell, JLGs acted somewhat like a credit monitoring mechanism at the local level. However with the compliances and structural changes brought about in the recent time, individuals are getting monitored and rated based on their own activities.

A study by European Bank and our own experience is now pointing to a clear shifting of the demand for loan more towards individual in sync with the market reality precisely due to the reason mentioned above. The challenge for us is to accept this reality and evolve a comprehensive structure to meet the demand while at the same time sticking to the basic ethos of microfinance.

Microfinance as a facilitator to cut the vicious cycle of poverty and lay out a clear direction towards capacity creation for triggering a revenue stream as an instrument for development has been debated in all its nuances. Yes, it is also true that despite the decades of debate there are still areas that need to be thought through. This is only natural as the perspective of the relevance of microfinance is dynamic and changes in sync with the changing economic and technological reality.

The current idea that is almost about to put a blinker at the level of implementation is the thought that the tremendous progress made in the realm of technology will make human intervention irrelevant in the microfinance industry The argument is that, technology by itself will lend its might so overwhelmingly as to make what we at the microfinance industry are doing through ground level direct engagement irrelevant.

This is a thought that doesn’t get supported by the reality and experience of the industry as this idea of rejecting the need for human interaction tends to ignore the reality at the beneficiary level. The requirement of the human engagement is dictated by the quality of the functional level of literacy. In the current complex social situation, knowing the alphabet and the ability to put signature on documents don’t count as literacy. The definition of functional literacy assumes understanding of the material read. And the financial inclusion requires financial literacy and access to financial products. Add the requirement of business and fit that into the swath and you will start realising the need for the spread of the engagement required for the microfinance customers.

To illustrate the logic of the situation let us take the case of a beneficiary or a customer who supplements the family’s income by rearing goats. If she needs a loan to expand she will have to repay it. But given her station in life the requirements that she needs to satisfy to obtain the loan is beyond her skill. Training and financial judgment will be key in her case. And no digital intervention can make the need for human interaction redundant in cases of this nature. The microfinance industry is therefore compelled to dedicate itself not merely to disbursement of loan to help create economic capacity but is also required to lend its hand in creating human resource without which economic capacity creation will remain a pipedream. In other words, the model followed in this segment focuses on her functional literacy as well.

There is an indirect statistical support to what I have reasoned. The fact that human intervention is so relevant is supported by the growth statistics contained in the MFIN Micrometer, March, 2018 issue. It says that the loan outstanding growth in FY 2017-18 compared to the previous year for banks has been 23 per cent. Compared to that NBFC-MFIs (excluding banking correspondents) have chalked up a figure of an impressive 48 per cent. This can be straightway attributed to the model of handholding that the NBFC-MFIs follow.

Therefore while the evolving digital technology may help connect, but when it comes to addressing the social roadblocks like literacy that stands in the way of cutting the Gordian knot of vicious cycle of poverty in the subcontinent, human intervention still holds the key.

At the beginning of the microfinance movement, the thought of how to secure the credit was paramount. With the poor being the focus, it was quite natural that a collateral as a pledge against any loan would be hard to come by. The concept of joint liability group was thought of as a solution that could address the issue of loan without conventional concept of collateral. The logic behind it was quite ingeniously simple.

Within a small locality neighbours are known to each other. Each one knows the others’ credit and trustworthiness. So if a group is formed by a set of neighbours and together they bear the risk of default by any member the problem of credit risk would be largely addressed by the group taking up the liability jointly. Should any member default, the group would take up the liability of repaying the defaulter’s debt. Hence it is dubbed as the Joint Liability Group or JLG.

However, the process couldn’t be an automatic one. Given the low level of literacy and corresponding low level of financial awareness, the process involved a direct engagement of staff representing the microfinance institutions. The group members needed to be taught ways of managing the credit they are accessing and its efficient deployment. This of course involves an intensely detailed engagement between the credit institutions and the group.

The logic worked and the system, as we can see, is thriving. However, with the changing times the need for products focused on individual requirements is being felt more pressingly every day. The JLG logic requires acceptance by the group concerned of an individual member’s loan requirement and also the purpose for which the loan is being taken.

With the growing opportunities, requirement spectrum of the customers is also exponentially getting wide. In the initial days, within a group, the deployment purpose of the credit used to be almost homogeneous. Therefore, acceptance of a member’s need by the others within the group was not a challenge. Now, however, it is as various members have varied deployment purposes that may not be acceptable as a liability risk by the group concerned. There is also another factor that is looming large. Within the same group some members perform better than others in terms of entrepreneurial ability. As a result their fund requirement to sustain their next stage of growth is often found to be beyond both the ability and willingness of the group to bear the liability involved in the demand for funds made by the member concerned.

The changing characteristics as discussed above are leading to a rising demand for individual loans from the microfinance institutions. Unless these demands are met the members will not be able to convert their initial success into a sustainable one. This would call for a new and different approach in microfinance.

Demographic transition in India and the issues involved are no longer of just academic interest. The impact of transition is now being felt everywhere so much so that it has even cast its shadows on the poor households.

To consider the impact it has on the poor elderly let us take a look at a survey that has become a point of reference for discussion on the demographic change in India. The human development survey conducted by the NCAER says that 45 per cent of the rural males and 75 per cent of the rural elderly women depend completely on others for living. In short, the family is the major pension and health insurance for the poor elderly in India.

However, with the increasing urbanisation and the intense desire to escape the clutches of poverty the young are leaving their nest in droves in search of employment elsewhere leading to a shift in the family dynamics of the poor. The joint family structure and along with it the support structure for the poor is threatened as a result. To note in passing, the joint family structure in India survived the longest in the world and looked after the elderly in the family. Therefore there was hardly any thought to provide for themselves as they grew old. Secured in the knowledge that by looking after the family now, they will be looked after by the family in turn when they grow old, there was hardly any compulsion to look for alternative channels of support for a time in the future when they would be out of actively earning stage. Now it is predicted that by 2050, 21.6 per cent of the population will be above 60 years old. Add the rising level of life expectancy to it and we are left with an elderly population without any health or old age income support of consequence.

As it is, pension coverage in India has a lot of scope of improvement. With just about 7.4 per cent of the population covered under any pension plan we can well imagine the intensity of the problem and the shape it might take in the near future. To counter this trend by taking advantage of the government encouragement to address the issue on a war footing, microfinance industry has a huge role to play here. It is now a reasonably accepted fact that the microfinance initiative is providing an increasing traction to financial inclusion by building financial literacy and providing access to fund to the needy. However, time has come for the industry to expand its product range by including health insurance and pension products for the aspiring poor – to those who are taking advantage of the microfinance – in a manner that would meaningfully address the emerging threat of a huge number of uncared for elderly population. A start towards this direction could nest in popularising micro insurance products.

Financial inclusion as a mission is at a crossroad. The equation that defines the process of inclusion is stated to be as follows Financial inclusion = financial awareness + access to finance.

The roadblocks to the process of inclusion have so far been the access to the deprived section of the people by the financial institutions. There have been various reasons for that. And the globally accepted one is the inability of the traditional channels to satisfy the needs of the poor due to the way they are built to function.

Necessity is the mother of invention as they say. The most effective way was hit upon in Africa. The villages there are not only inaccessible in some parts, but even if they were accessible, due to preponderance of theft, in parts of the continent, it was not even safe to carry cash across the street.

The challenge there led to the evolution of the digital wallet. It not only revolutionised the transaction system in Africa by extending the wallet to transfer to the remotest corner of the African states making life easier. Gradually it evolved into a number of financial transactions, including remittances and micro credit.

It turned out to be a game changer in the fight against financial illiteracy. World Bank became a big advocate of digital financial reach and India jumped into the band wagon. Fortunately now the penetration of digital technology is reaching out to the unreachable very fast. With digitization, it is becoming easier to reach the left out segment with financial products. Now let us get back to what we started with. The financial inclusion model has awareness as an essential and necessary condition. Unless the deprived ones are aware of the access, availability of products is of no use.

As we have already mentioned in passing about the failure of the traditional financial channels to take the inclusion model forward due to their structure, the role of microfinance institutions become so important. The microfinance institutions by the very nature of their activities interact with their customers individually. The handholding of the clients necessitated by the way loans are given out and risk minimised requires of them to educate their customers in financial ways. The step in the process is of course for the industry to embrace the technology and use it to gain deeper penetration.

In a new India that is poised at a point of inflection, microfinance institutions are also transforming themselves by adopting to the scopes being opened up by the digital technology and become more effective.

In the literature dealing with poverty the proposition that the uninsured risk has significant welfare cost not just in the short run but also in the long run by perpetuating poverty has taken up almost an axiomatic character. The fact that it has done so does not require a deep mind to reflect on it if we take some time out to think through the way the poor live and the consequent risks they are exposed to.

The poor are generally exposed to two types of risks. One of course stems from the personal level like illness, unemployment or theft of meager savings. Then there is the macro level risk like drought, flood or recession affecting earning capacity. All these have significant welfare implications by creating road blocks in the way of alleviation of poverty.

The poor tend to create their own risk hedging or trading off mechanism. The most common one that comes to mind to anybody is stashing away of cash for the bad time to come. A very unproductive no-return strategy as the surplus is hoarded whereas an investment with that amount might have provided some return to add to the surplus already generated.

There are other ways and all of them have a huge welfare cost to the society. For example, the way the deprived ones hedge against unemployment is debilitating in terms of welfare cost. To hedge against unemployment the poor tend to engage themselves in multitude of employment options so as to create a bouquet of earning sources. What it leads to is a cost to the society as it loses the best productivity option of its members. It also in the ultimate analysis leads to lower earning for the poor thus pinning them down to the vicious circle of poverty and reduces their ability to generate surplus.

The only way out for them is to go for the financial hedging against such risks through insurance. The poverty alleviation policy of the government also recognises it. But to take it down to the bottom of the pyramid needs the active involvement of the microfinance institutions. Given their level of individual level interaction and understanding of the needs of the poor, they can bring the segment concerned on board through awareness building and providing them with the exact product to satisfy their individual need thus closing a big gap in the financial inclusion.

‘Roti, kapda aur makan’ was the original development slogan encapsulating the poverty alleviation programme in India. It has now changed to ‘bijli, sadak aur paani’. But the essence of the development strategy hasn’t really changed. What has changed is the vehicle of delivery that will generate ‘roti, kapda aur makan’ for the underprivileged.

To look into the rationale of why ‘makan’ or the housing for the poor might actually be the answer to their quest for financial shelter along with ‘roti aur kapda’ let us first look into the reason behind the change in the development slogan.

If we look at the first, it is clear that the slogan specifies development target and fails to identify the route to achieve that. The second, on the other hand, identifies the route.

Electricity, road and water together create the basic infrastructure for livelihood generation.

The logic here is simple – if we can provide the poor with market access, selling their enterprise and labour, to that extent, becomes easier. But market access is not enough. To leverage market access one also needs access to finance so that they can fund their enterprise to turn their labour into marketable product.

This is the point in the chain where microfinance companies and affordable housing enter the picture.

With more than 90 percent of the poor lacking proper shelter, access to affordable housing is dire. Add the fact that for the poor house is where the production takes place, the issue of housing takes up an extra dimension in the fight against poverty.

Housing for the poor is more often seen as just a house. But if we look at their housing need beyond the need for a shelter, as it has been argued here, we clearly see that it is also an empowering infrastructure to boost their productivity. Microfinance institutions have the access and the necessary skill to evaluate and minimise risk of credit to the poor. Given this skill and the government’s focus on creating access to affordable housing, microfinance can go a long way by adopting housing loan as a product to create financial shelter for the poor.

Historically informal money lending operations without legal supervision have been a major problem in India especially in the rural areas. The stories of how the poor rural folks have continued to suffer in the hands of unscrupulous money lenders have found their place into major research area in social sciences, as also in celebrated literary works.

To unchain the rural poor from the clutches of the unscrupulous shylocks various attempts like rural branches of nationalized banks and cooperative banking have been experimented with without any major impact on the operations of the informal money lending business. Even the experiment with the banking correspondents that attempted to take banking operations to the doorsteps of the poor through briefcase carrying agents have not had the desired impact.

However, historically, micro credit and micro finance institutions have been the best combatant against the usurious practices of unscrupulous money lenders. For example, to help the poor against the shylocks, Franciscan monks initiated community oriented pawn shops in the 15th century. European Credit Union movement started in the 19th century. However, the microfinance movement as we know of today started in South Asia in the 1970s with the 1980s marking the milestone decade for the microfinance movement in India.

While the microfinance companies emerged as a positive reaction to the exploitation of the poor by the shylocks it needed a reactive policy response for the other financial systems to emerge and compliment the microfinance activities in the areas of remittance and other areas in which microfinance cannot act as these areas exceed the specified ambit of their operations.

In fact, the phenomenon of illegal deposit raising companies raising funds from the poor with the promise of absurd unsustainable rates of return and then expectedly failing triggered another attempt by the monetary authorities of India to initiate an operation to bring the rural masses within the fold of the legally sanctioned institutionalized financial structure in areas where microfinance institutions cannot act. Referred to as the financial inclusion, the attempts got structured through various committees.

The shape of the new institutions was looked into in details by the Raghuram Rajan Committee in 2009. The committee felt the need for private well governed deposit taking small finance banks to address the issue. The committee in its recommendation provided a detailed structure that along with other committee reports became the roadmap for the RBI to release 10 licences for such banks and the declaration was made by the Bank through a press note issued on September 16, 2015. That was the genesis of the payment banks taking their formal shapes.

All these efforts are now yielding results. According to the Global Findex Report, 2017, of the World Bank, the inclusion impact is quite discernible from the way the number of account holders are growing very fast in the country. In 2011, 35% of the adults in the country had accounts. This rose to 53% in 2014 and then to 80% in 2017. Between 2014 and 2017 the number of accounts opened globally is counted at 51.4 crore. India accounted for 55% of this gross figure.

Compare this with the 2003 situation and the effect would be clearly discernible. According to the situation indexed by the NSSO 59th round survey of January-December, 2003, 51.4% households were financially excluded from formal or interestingly, even informal sources! Of the total farmer households, only 27% had access to formal sources of credit and one-third of this group also kept borrowing from the non-formal sources. Overall 73% of farmer households had no access to formal sources of credit.

Net net we can with conviction conclude that with the regulatory authorities realizing the huge role that the new age financial institutions can play in financial inclusion mission, things have started rolling in a positive direction. The awareness being created by the microfinance institutions and the penetration of the digital media to the base of the pyramid is amazing. It is also creating huge prospects in the territories that were previously given up by the India Inc as traditional market due to inaccessibility in all senses of the term. In short the new age financial institutions, including the microfinance institutions have started making their presence felt as a major change agent in what is being referred to as the emerging tiger in Asia.

Globally, not excluding India, the MFI intervention model rests on two principles.

• Providing access to finance to those who do not have access to the traditional channels and
• Empowering them to leverage the accessed fund gainfully and efficiently.

This creates a stream of revenue to the beneficiary in the form of income while at the same time creating indirect employment opportunities for others.

To understand the chain let us look at the reasons that have led to the proposition that we have specified. The first question that we need to look at is the reason why by the turn of this century the policy focus shifted to micro finance as a tool to empower the people at the bottom of the pyramid or, in other words, the poor.

The poor people are caught in the vicious circle of poverty as they lack surplus resource to propel themselves out of the poverty trap. The government policy everywhere has now come to accept the fact that the poor, lacking education as they do,fear to access the traditional channel like banks even if it is at their doorsteps because of the perceived complications in obtaining loans for generating a stream of sustainable source of income.

They therefore need institutions to approach them at their doorsteps, convince them about the opportunities that they may create with loan funds and guide them in the proper utilization of the credit they are availing themselves of. This is where the unique structure of microfinance institutions comes into play. By the very structure of their functioning microfinance institutions provide them with the financial resources, guide them in the process of the fund’s investment so that from the returns of that investment they not only create earnings for the sustenance of their families but also generate that surplus to pay back the loan and grow. This process is now known as capacity creation.

Now comes the more interesting part. For every single person thus empowered through microfinance intervention a few more are benefitted creating a chain of secondary and secondary to secondary beneficiaries. In other words, a chain of indirect employments gets created from one direct beneficiary. If someone sets up a shop as the primary beneficiary, that shop will need suppliers, transport to cart supplies and so on and so forth. In the process every single indirect beneficiary in turn also keeps creating job opportunities and source of income for others down the chain.

This is why capacity creation through microfinance intervention is said to be a very important generator of opportunities to alleviate poverty.

Generations of students of Economics grew up reading ‘Small is Beautiful: A Study of Economics as if People Mattered’ by the German born British Economist E F Schumachar. Published in 1973, the book champions small, appropriate technologies that empower people more than large scale units working on technologies that have a lower employment potential.

Ever since the book was written the debate over appropriate technology has never ceased. But the debate notwithstanding and logical intricacies aside, it is now statistically and experientially accepted that the ability of MSMEs, both in formal and informal sector, generate more employment per unit of investment than their big brothers.

The story in India is no different. The data available from the latest annual reports of the Union Ministry of Micro Small and Medium enterprises show that the sector provided 39 lakh 36 thousand 788 crore rupee in 2015-16 by way of gross value addition. The growth clocked was 7.62 per cent with the share in the total value addition being 31.6 per cent. The GDP share of the sector was a substantial 28.72 per cent. The current Economic Survey provides the same accolades to the sector by counting its contribution to the export at more than 40 per cent.

According to a KPMG survey in the East and North East the informal manufacturing sector keeps contributing more than 60 percent to the SGDPs. According to the ministry concerned, generation of employment by the sector in the FY 2017-18 is estimated to be 85,792.

The CMIE in its February, 2018, report says that 31 million unemployed are searching for jobs. Keeping this in mind and the potential of job creation per unit of fixed asset in the sector, MSMEs are becoming our bet as a development driver with MFIs acting as their financial consorts.

Repeated talks of market’s ability to distribute gains of growth have triggered a reasonable faith in the power of the market to such an extent that it has almost taken up a divine status. If, however, we take out the veil of divinity, we will find that even the market needs facilitators to distribute the gains from growth and take it down to the poorest of the poor. And it is precisely here that the role of microfinance in the development paradigm is recognized as crucial.

As the saying goes, there is no free lunch. And the underprivileged cannot be taken out of their rut by providing them with a free passage, read doles, to prosperity. For the poor to benefit from the development process a structure of enabling agents is required to empower them so that they can transact in the market by selling services or products like everybody else in the economy. It is now an accepted proposition in the theories of development that the poor remains poor because they do not have access to the means and the technology to leverage the means. This distinction has been the major starting block for economists like Abhijit Banerjee and Esther Duflo of MIT in exploring why poverty is so sticky.

Globally all the work on poverty has now recognized that creation of mere access to finance is not enough to alleviate poverty. That is because the traditional channel stops at providing them access to finance without helping them to walk the way. This is like providing timed water connection to a person who doesn’t have any storage facility. The UN charter on inclusion therefore explicitly states that no government can do the hand-holding as it requires a special skill that no traditional channel by their very legacy can generate.

This lacuna has generically facilitated the birth of a powerful concept like microfinance and driven the UN to loudly advocate the need for those financial institutions in the inclusion charter that can not only provide access to finance but also provide the target cohort with the technology to leverage the help. Microfinance institutions are the ones that are not only providing financial access to the deprived section but are also handholding to walk the walk and talk the talk of development aspirations.

With the government agencies and the Reserve Bank of India predicting a growth rate of seven per cent plus the onus on the microfinance industry as the development finance vehicle therefore is going to be even more acute in the context of Indian economic reality.

The need to have a thriving range of large corporations on a national scale notwithstanding, it has been proven over time that the presence of a wide array of micro, small and medium-scale enterprises (MSMEs) is an important growth driver. It is also a fact that the need to provide financial assistance and business development services to MSMEs is essential to ensure sustainable and consistent economic growth. It is no secret that the need of the hour is to show greater financial commitment towards such enterprises, thereby pushing the growth engine as well as generate employment at a local level.

A major roadblock for the development of MSMEs has been a lack of access to, or lack of, credit. While MFIs have come forward to do the needful, an important aspect in identifying MSMEs to back is to analyze and understand their financial needs. Since MSMEs differ in scale of operations, as well as in products and services they deal with, the need is to finance them in a customized manner. This requires to be determined by factors like whether a particular MSME is in a start-up phase or an existing one looking at expansion. So, MFIs looking at providing loans to MSMEs need to identify whether they would like to support existing entrepreneurs or back potential entrepreneurs with growth prospects.

Raising working capital is the primary obstacle for existing MSMEs, and most such entrepreneurs often end up borrowing from informal lenders at much higher rates of interest.

Since MFIs deal with a higher level of risk compared with that of formal banks, a careful analysis of an MSME’s portfolio carries the promise of good repayment. While dealing with MSMEs, microfinance institutions generally provide the dual services of financial intermediation and enterprise development. Financial intermediation involves providing funds to MSMEs in the form of business loans. These loans can be utilized for further investment in the existing business or for setting up smaller business ventures.

MFIs also provide enterprise development services along with the knowhow to raise human capacity and organizational abilities. Besides, they also provide guidance about access to markets, skills development, training in marketing and use of technology so that their customers can use their resources more productively.

Given that MSMEs need to play a major role in adding to the nation’s wealth through sustainable growth, it is imperative for more and more MFIs to join the development juggernaut, to push the growth engine in a more efficient manner.

Home is where the heart is, goes the oft-quoted English proverb and this adage is probably at its truest in India’s villages. At a time, when the government is putting stress on promoting health and hygiene, often the first step towards uplifting the rural populace is to inspire them in working towards having a better home, with proper sanitation facilities.

Given that most MFI customers operate from their homes, it is important to remember that staying in a better home is a key to improving entrepreneurial skills. The presence, or lack, of a pucca house, with proper toilet facilities, could have significant impact on productivity. This goes on to say that if MFIs venture into the segment of providing loans for affordable housing, it would have a direct impact on the core agenda of entrepreneurship of micro enterprises.

Microfinance has proven over the years that its presence acts as an effective mechanism to disseminate crucial information on health, sanitation and other living standards, which are important concerns for people in villages. Microfinance has had positive impact on the living standards of such people, helping them not just to cross the poverty line, but also to empower themselves. Notes from the field recognise that microloans provide the right environment and opportunities for people to improve their standard of living.

While it is not a secret that rising income is among the key factors in aiding development, introduction of housing loans by MFIs will be instrumental in bringing about both economic and social changes.

In simple terms, when MFI borrowers, who mostly run their enterprises from home, the entrepreneur is more likely to succeed, if living in a better home. While a healthy and happy person will always have better productivity, one operating the business from inside a rundown and unhealthy room, with hardly any natural light or ventilation, will have reduced chances of scaling up.

Microfinance is no more just a tool to eradicate poverty; it has become a crucial catalyst for individual development and growth in entrepreneurial activities in economically under-served areas of the country. All reports on microfinance succinctly suggest that over the last few years MFIs have helped change not just people’s lives but also infused fresh blood into rural communities, and created a sustainable financial eco-system.

Microfinance’s agenda of bringing to light the often neglected and oppressed poor people from villages no more seems a horizon that cannot be touched. Under such circumstances, it is time for MFIs to extend the scope of their operations to stand by small and medium enterprises, an area that has not been paid much attention.

Even though financial inclusion is at the top of the agenda there is still no roadmap as such to provide loans to those who have outgrown amounts above the upper threshold of MFI loans but are still not big enough to avail SME loans from commercial banks. The needs of these enterprises have till date remained unmet by both MFIs and commercial banks. Since such enterprises have the potential to act as major source of employment in villages, besides being significant drivers for economic growth in rural areas, access to financial services for such borrowers could help further a notch the government’s key policy objective.

In India, MFIs are allowed to lend up to 15 percent of their net assets in non-microfinance loans, some MFIs like VFS are working towards providing larger loans to select borrowers, whose businesses show the potential for scaling up. While the government launched the Micro Units Development and Refinance Agency Bank (MUDRA), a public sector financial institution, in April 2015 in a bid to cater to such borrowers, the road is still long and windy. Since all large MFIs report to credit bureaus, it is not hard to prevent multiple lending, in the process helping first-time borrowers to build credit histories.

Although there are still some doubts given that such loans are new, there is a need for studies on lending models and variations in lending patterns by different regions of the country. However, SMEs across the globe have shown promise as strong role-players in national development, primarily owing to the volume of employment they generate. There remains no doubt that catering to financial needs of SME borrowers has considerable potential to stimulate local economies in a more inclusive and dynamic manner.

As microfinance institutes continue to prove their role in forwarding the government’s agenda of overall financial inclusion, particularly in ‘last mile’ access to loans in far-flung villages, it is time for the government to increase its efforts in encouraging MFIs to support SMEs. Taking a right step in this direction would be to allow MFIs expand the repayment period for microloan customers, which will help not just to minimise their lending rate but will also allow them to distribute payments of interest over a longer time period. Since most MFIs follow a rigid contract, most installments are paid back on a weekly basis, starting within a few days of a loan being disbursed.

The repayment frequency and the short span within which the first repayment is made, however, do not always guarantee better repayment behavior or on kinds of investments they make. Studies by researchers, as well as ground realities have revealed that less frequent repayments does not mean increase defaults. Even though a two-month grace period before the first repayment is made did slightly raise the default rate slightly, it also allowed entrepreneurs to invest more in their businesses and resulted in long term economic gains. A section of MFIs have argued that weekly repayment meetings create a sense of fiscal responsibility, besides increasing interactions with loan officers, which help build as stronger sense of trust between customers and MFIs.

Weekly repayment schedules might mitigate risk to certain extents but it also makes payment collection more expensive for MFIs. In a more pragmatic approach, if the frequency of repayments from far-flung areas is reduced, the cost of collection will go down and could help MFIs to offer lower rates of interest from customers.

It has also been noticed that when borrowers are made to make the initial repayments within days of the loan being disbursed, they typically set aside a part of the loan amount for the purpose of repaying the first few installments. In the process, they feel discouraged to invest in raw materials or even proper infrastructure, which, in the long run, prevents them from scaling up their business.

Even though recent models have shown definite signs that expanding repayment periods will have long-term positive effect on both borrowers as well as micro lenders, most MFIs continue to stick to the traditional model of repayment contract. It is here that the government may proactively encourage MFIs to accept repayments over an expand schedule.

The growth of MFIs in India is a well-documented matter. The success of microfinance is such that it is one of the largest growing sectors in the country, with recent reports finding that microfinance has shown a 64 percent growth over the last three years. And this change is best demonstrated in eastern India, with West Bengal leading the charge, along with Bihar and Jharkhand, besides North-Eastern states such as Assam and Meghalaya. In fact, microfinance has grown by 26 percent over the last fiscal year, with maximum growth being seen in West Bengal, Assam and Jharkhand, as 2018 report by KPMG reveals.

With a large part of rural India remaining out of the purview of formal banking, MFIs have been playing an enhanced role in financial inclusion and financial literacy. Even though many in the formal banking sector had thought microfinance to be moving towards market saturation, ground realities reveal that this growth will continue to sustain over the next two years. Since the presence of formal banking is low in rural areas, the somewhat overwhelming presence of MFIs will remain a groundbreaking factor for microfinance.

It has become apparent that MFIs have not only worked hard but have also emerged the bets channel for bridging a crucial gap between formal banking channels and financial inclusion in far-flung rural areas. VFS is an important showcase of how MFIs have managed the break apprehension that rural India had about the normal banking system. It is a fact on record that MFIs have been showing strong forward-moving motion and by 2020 these are likely to cover most of rural India.

KPMG predicts that projected growth rate will remain between 25 and 30 percent over the next five years in the region. It is imperative that MFIs continue to remain on this journey of transformation, with the help of digital technology so that they can keep adding to the long term sustainable development of Eastern India’s economy.

India is a nation hard to ignore, both in the context of Asia, or even the rest of the globe, because of the significant strides it has taken towards development. It is also true that India lives in its villages.

Rural India might not be as under-developed as it was even a decade back, but the cause of affordable housing in villages continues to remain a tough task. This owes to commercial banks, which provide housing loans to urban India, did not have similar offerings for village residents, mostly due to their cautious approach towards risk.

In such a scenario, MFIs like VFS have a major role to play in coming forward to provide loans for low-cost and affordable housing. While various schemes offered by the central and the state governments provide succour to a large number of village residents, the widespread network of MFIs are well-fitted to service the rural housing sector. With the National Sample Survey organisation estimating that around 64 percent of rural houses are semi-pucca (semi-finished) or kutcha (primitive), MFIs can come forward to provide such housing loans, which typically vary between Rs 1.5 lakh to Rs 2 lakh.

Microfinance housing loans will also provide a boost to the government’s impetus on better hygiene and sanitation, since while building pucca houses, village residents will focus on building toilets inside the house. MFI housing loans may also be provided in a modular manner, instead of one single loan as offered to urban customers, making the EMIs smaller and shortening the payment period, so that such loans easier to access and the burden of repayment is lessened at the same time.

MFIs providing such small housing loans open up a situation that is win-win because such loans will provide millions of rural Indians an opportunity to have a pucca house and, in the process, help MFIs work around a market, which the NSSO estimates is worth around Rs 6,400 crore. Since MFIs typically serve customers who are not salaried and come from a smaller income bracket, in other words, those not served by commercial banks, microfinance housing loans could help the government change the way people look at housing loans. Interestingly, unlike urban customers, since borrowers in villagers are psychologically averse towards long-term loans, MFI housing loans will change the rural landscape.

The government’s decision to demonetize two denominations of high value currency notes and to push forth the idea of a cashless economy since November 8, 2016 is indeed a paradigm shift in India’s economic history. Since the platform for ‘Digital India’ was launched, MFIs have been playing a very important role in taking it forward.

Even though the transition was not easy for MFIs, given that majority of their customers are in rural areas, which have traditionally remained under-served by commercial banks, and almost all transactions were done in cash. MFIs, like VFS, have been working towards implementing a system where cashless transactions are encouraged.

While supporting the significant transition to remain in sync with ‘Digital India’ had its roadblocks, MFIs have adopted ways to disburse loans in a cashless manner, and have even been encouraging similar process for repayment. Digital transaction has also emerged beneficial for MFIs as this helps to mitigate risks and bring down operational costs, by cutting down on the system to handle large volumes of cash every day.

A post-demonetization report from Microfinance Institutions Network (MFIN), the umbrella agency for MFIs in India, found that more than 60 percent of micro-lenders have taken up cashless methods to disburse loans, with more than 39 percent of loans disbursed in the financial year 2016-17 was done digitally. The report found that in 2016-17, while 88 percent of total MFI loan disbursements were electronically, 50 percent repayments were via cheques and 33 percent through electronic transfers.

Based on the understanding that the best possible methods for them to go digital, a large number of MFIs have initiated processes and technology of promoting digital technology in their business. For its own purpose, VFS has developed a mobile app to connect the entire organisation, from the topmost stakeholder to the last person working at last mile connectivity. The internal app was inspired by the vision that the digital process will help achieve a much better form of financial inclusion.

Going digital has not just helped MFIs like VFS to provide seamless and faster dissemination of loan, the process has also helped gain better cost benefits. MFIs are also working on using other transaction models, like Aadhaar-enabled payments, mobile wallets and pre-paid cards. A general belief in the microfinance industry is that with increasing use of digital methods and MFIs actively promoting cashless payments, more than 100 million e-transactions could be seen by 2020.

There remains no doubt whatsoever that MFIs have gone where regular banks do not dare to go. Over the years micro-credit lenders have developed an enviable network that connects much of rural India. Given the circumstances, it seems prudent that this network is used to push the government’s mandate of not just financial inclusion but also a cashless economy.

While the government has taken steps to launch Jan Dhan accounts for every Indian and more than 50 percent of India’s population has a bank account to its name, since 2014, only around 12 percent of these account holders made cashless transactions in the past year, finds a World Bank survey from 2017.

Bappaditya Mukhopadhyay, Professor of Economics & Finance at the Great Lakes Institute of Management, states that the agenda of a cashless economy can only be successful when more and more financial activities are done through these accounts, electronically. While the government already makes digital transfers of its subsidies and other payments, unless other transactions, beyond state-backed payments are made on these accounts, the agenda will not reach its full potential.

This is exactly, where MFIs have a role to play and that the government should properly utilise the vast network non-banking financial entities like VFS have developed over time. And the MFI network can be used as a stable platform to encourage cashless transactions in rural areas. While this will also serve the purpose of attaining widespread financial inclusion, the approach will need to be different Despite the presence of bank accounts, there have hardly been cashless transactions in rural areas. This opens up the space for a mechanism where MFI network can be used to promote cashless transactions and they suggest incentivising micro-lenders for that purpose.

MFIs like VFS have a widespread reach in rural areas and are often sole financiers for entire village communities, where most households, as well as local traders, are their clients. If MFIs are incentivised in lieu of utilising their network, micro-lenders can, in turn, develop and maintain a network of cashless transactions. In order to achieve this, the government can come up with any innovative scheme like providing the MFIs with certain percentage of all cashless transactions in its network.

This will give a major boost to the government’s financial agenda, since more than 200 million households across India are connected to microfinance institutes. The MFI rural network is the perfect platform to promote financial inclusion, once the systems and processes for the incentive programme are in place.