Microfinance is changing, so are the rules
The RBI’s recommendations take into account the changing dynamics of the microcredit industry and the future of a self-reliant India.
When I started my experience in Bihar in 2006, providing unsecured loans to low-income people in remote places, I was laughed at. Everyone in my family and my circle of acquaintances doubted the recovery of the money and were quite convinced that the entire corpus would be written off as a bad debt. But I persisted and in Hajipur, Vaishali district, I started the first branch, providing unsecured loans to women.
After a few months, a borrower’s spouse named Shanti (name changed) was charged with a crime and disappeared. The family as a whole went into hiding. When our field worker went to the center meeting for weekly collection and could not find Shanti, he asked other members of the group to cover his costs. They contributed to the reimbursement, but they were worried. That day, late in the evening, there was a knock on the door and, to our amazement, Shanti showed up to pay her debt. She informed us that the group leader had already received the next three installments.
Microfinance in India has emerged as a viable platform for economically disadvantaged people to escape the debt traps of informal and discretionary lenders, as Shanti’s story shows. The reality that previous banking solutions were unable to reach people at their doorsteps and the fact that banks had constraints cannot be ignored, and microfinance institutions have stepped in to meet this need.
Before December 2011, NGOs and new and smaller non-bank lenders were the main drivers of microfinance (NBFC). As the concept gained traction and attracted private investment and equity capital, problems such as large debt, multiple loans and high interest rates emerged.
Following reports that several female borrowers had committed suicide due to non-payment, the government of Andhra Pradesh passed an ordinance to regulate private microfinance companies in October 2010. microfinance has also been accused of using unethical methods to collect reimbursements.
the Reserve Bank of India (RBI) was forced to intervene and the microfinance sector was first regulated. In December 2011, the RBI imposed strict lending guidelines, capping lending rates at 26% and limiting spreads to 10%-12%. It also determines how much money can be lent to a single borrower and defines who that borrower is. In order to simplify lending, these stringent requirements were later relaxed.
The general microfinance loan portfolio as of December 2021 was Rs 2,56,058 crore, with 105.8 million loan accounts. According to the Microfinance Institutions Network (MFIN), NBFC MFIs have 78% of their portfolio in rural India and 22% in the country’s metropolitan areas. If Nabard’s 2020-21 report on the status of microfinance in India is added, the industry has reached around 130 million Indian families, almost a third of the country’s population.
There is still a large market to tap into, and the December 2011 laws have proven to be “barriers” to further expansion of the sector. There is a desire for change, and several forces are pushing for these changes:
Rural India’s enthusiasm and acceptance for microfinance is fueled by technology, digitalization, start-up culture, new players and rural India’s passion and acceptance for microfinance.
Fast forward to the year 2022
The notion of a three-day customer training has been replaced by a one-hour product introduction and explanation. Emotional connections and customer training are supplanted by credit scores and solvency. The customer is largely responsible for this. They adapt to changes in the field and require additional support from microfinance players.
This is the aim of the new set of RBI guidelines, which were published on March 14, 2022. The new laws describe microfinance loans as “collateral free” loans to a household with an annual income of up to Rs lakh and a husband. , wife and unmarried children (Previously, the amount was Rs 2 lakh for urban areas and Rs 1.6 lakh for rural areas.) The new laws also increase the ceiling on interest rates to ensure that all Microlenders are integrated into a similar platform, driving the growth of the industry.
The regulator has provided the microfinance sector with a wide range of options. The microfinance environment is changing rapidly. Individual loans could eventually replace group loans in the years to come; the RBI guidelines recognize this. In some ways, the RBI standards reflect the macro picture of the industry.
Emerging Trends in Microfinance
The new laws have blurred the boundary between rural and urban areas. Microloans were originally intended only to generate money, but there will be a change.
Microcredits can now be used to finance personal needs such as building a house, buying a two-wheeler, paying medical bills or financing studies. As a result, new industry trends could include individual loans, small loans and short-term loans, and fully digital processes from loan submission to distribution and repayment.
With the tsunami of digital disruption reaching the farthest reaches of the country, the target customer base is also changing. Rural Indian women are gradually adapting to the changing dynamics.
There will be hurdles, but with more data on household composition and incomes, the application of data analytics, and the replacement of manual operations with technology, we will see a dramatic decrease in long-term operational expenses. .
By 2025, India’s microfinance sector is expected to grow at a rapid compound annual growth rate (CAGR) of over 40%, driven by growing demand for microfinance loans from the MSME sector.
There are a few domain features that are critical. Microfinance is a key enabler of rural job creation. According to the National Council of Applied Economic Research (NCAER), the industry created 13 million jobs in 2018-19, including bank-sponsored self-help organizations. He also became a strong supporter of Atmanirbhar Bharat and women empowerment.
Women have more opportunities
Women consumers are the backbone of the microfinance industry, and they deserve credit for the spectacular success of the sector. It is good that they have developed a practice of saving, smart spending and immediate repayment to qualify for the next loan. India will have 75 million working women in the next ten years. According to research by the World Economic Forum, increasing women’s labor force participation to the global average of 48% will bring $700 billion to the economy. This is just a small sample of our clients.
edited and proofread by nikita sharma