Kuldip Maity

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.