In 2006, when I started my experience in Bihar extending collateral free loans to low income groups in remote areas, I was a laughing stock. Everyone in my family and friends was skeptical about getting the money back and somewhat certain that the whole corpus would turn into a bad debt. But I stayed the course undeterred and opened the first branch in Hajipur in Vaishali district, providing unsecured loans to women.
A few months later, the husband of a borrower named Shanti (name changed), was involved in a criminal case and ran away. The whole family went into hiding. When our field worker went to collect weekly at the center meeting and could not find Shanti, he asked the other members of the group to pay for her. They contributed the refund amount but were worried. Late in the evening that day there was a knock on the door and to our surprise Shanti showed up to pay her dues. She informed us that the next three installments were already with the group leader.
Stories like Shanti’s reinforce that microfinance in India has emerged as a promising platform for the economically underserved to escape the debt traps of informal and discretionary lenders. There’s no denying the fact that the banking solutions of yore couldn’t reach them at their doorstep, nor can banks have limits. This void is filled by microfinance institutions.
Prior to December 2011, microfinance was mainly driven by NGOs and new and smaller non-bank financial companies (NBFCs). As the idea took hold and attracted private debt and equity, challenges such as high debt, multiple loans, and high interest rates began to surface. These challenges turned into a crisis in October 2010 when the government of Andhra Pradesh passed an ordinance to control private microfinance activities following news that some female borrowers had committed suicide due to non-payment. Allegations have also been made against the microfinance industry for using unfair means to obtain repayments.
The Reserve Bank of India (RBI) was forced to intervene and the first attempt was made to regulate the microfinance industry. In December 2011, the RBI introduced strict lending standards by capping the lending rate at 26% and spreads at 10-12%. It also limited the amount that could be granted to a single borrower and even defined the borrower. These strict rules have been gradually relaxed to facilitate loans.
As of December 2021, the general microfinance loan portfolio was Rs 2,56,058 crore with 105.8 million loan accounts. According to the Microfinance Institutions Network (MFIN), in terms of geographical distribution, NBFC MFIs hold 78% of the portfolio in rural India and 22% in the urban areas of the country. If this is complemented by Nabard’s 2020-21 Status of Microfinance in India Report, the sector has reached over 130 million households in India, or only about a third of Indian households.
There is still a huge market to conquer and the rules of December 2011 became “stumbling blocks” for the sector to sustain its growth. There is a need for change and the driving factors for these changes are many: technology, digitalization, start-up culture, new players and rural India’s enthusiasm and acceptance for microfinance.
Fast forward to 2022
The concept of a three-day customer training is now replaced by an introduction and description of the product, which is done in a few hours. Emotional connection and customer training are replaced by credit rating and solvency. This is largely driven by the customer. For microfinance actors, adapting to the new landscape required additional support.
The new set of RBI guidelines, released on March 14, 2022, aims to provide this support. The new rules define microfinance loans as “unsecured” loans to a household consisting of a husband, wife and unmarried children and with an annual income of up to Rs 3 lakh (revised from Rs 2 lakh for urban areas and Rs 1.6 lakh for rural areas). earlier). The new rules also lift the price cap on interest rates to ensure that all microlenders are brought onto a common platform, which would increase industry growth.
The regulator has given the microfinance sector a range of opportunities. The microfinance landscape is changing at a rapid pace. It is possible that in the coming years the group model will be replaced by individual loans; RBI rules recognize this. The RBI guidelines somehow reflect the macro picture of the sector.
New Emerging Trends in Microfinance
The new rules have leveled the rural-urban divide. Microloans used to be for income generation only, but now there will be a wider scope. It is now possible to borrow microloans for personal needs such as building a house, buying a two-wheeler, health expenses or the cost of education. Therefore, new trends in the industry may be individual loans, short-term and short-term loans, and fully digital operations from loan submission to disbursement and repayment.
Target customers are also changing with the wave of digital disruption reaching the farthest corners of the country. Women in rural India are gradually adapting to changing dynamics.
There will also be challenges, but we will ultimately see a significant reduction in long-term operating expenses with more data on household composition and incomes, the use of data analytics, and manual processes replaced by technology. The Indian microfinance market is expected to grow at a rapid compound annual growth rate (CAGR) of over 40% through 2025, mainly driven by growing demand for microfinance loans from the MSME sector.
There are a few aspects that are essential to the field. Microfinance is a great catalyst for rural employment. According to the National Council of Applied Economic Research (NCAER), the sector, including self-help groups promoted by banks, generated 13 million jobs in 2018-19. He has also emerged as a strong supporter for Atmanirbhar Bharat and women empowerment.
Increased opportunities for women
Clients are the backbone of the microfinance industry, and credit for the sector’s phenomenal growth belongs to them. Their habit of saving, spending prudently and repaying on time to qualify for the next loan is commendable. By the next decade, India will have 75 million women in the labor market. Today, we only have about 27% women in the workforce, and if we reach the global average of 48%, according to a study by the World Economic Forum, we will add more than $700 billion to the economy. This is only an overview of our clientele.
The author is co-founder and CEO of Light Microfinance. The opinions expressed are personal.
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