Monday 25th September 2017

    The changing contours of micro lending in India

    Indian micro finance institutions (MFI) came of age in 2015 when Reserve Bank of India (RBI) decided to grant 8 of them a small finance bank license. The development showed the regulatory comfort to the business which stabilized after the Andhra Pradesh crisis in 2008-09 when government regulation crippled micro lending business.

    Micro lending is an economic development tool that addresses the concerns of poverty alleviation by enabling the poor to work their way out of poverty. It provides credit to that section of the society that is unable to obtain credit at reasonable rates from traditional sources. More here.

    After recovering from the Andhra Pradesh crisis, another major shock to this sector was withdrawal of high value notes in November 2016. Micro lending, which was predominantly in cash, was hit due to demonetisation. Over 75% transactions were cash-based in this sector. Transition to digital payments has been slow due to low literacy level, poor technology infrastructure, and lack of suitable payment solutions.

    But the players in this sector also saw the demonetisation exercise an opportunity as it slowly but steadily moved towards a cash lite model. Though it is still a long way to go, the journey has certainly started.

    An interesting study by Micro Finance Institutions Network (MFIN), a self regulatory body and MicroSave, showed how the transition has started post the demonetisation period.

    One of the key findings of the study is that in the fourth quarter of FY 2016-17, 39% of total disbursements and 5% of total repayments of the respondents were reported to be cash-lite. According to the report, over 60% of NBFC-MFIs have adopted cashless methods for disbursements. While NBFC-MFIs are increasingly adopting cashless methods for disbursements, only 5% of cashless repayments point at slower pace of adoption by customers.

    MFIs perceive that the adoption of cash-lite models has led to a positive impact on operational aspects.

    According to Ratna Vishwanathan, CEO, MFIN, “Demonetisation and government’s push to adopt digital transactions have helped in NBFC-MFIs’ transition to cashless modes. Moreover, it has also helped in increasing awareness about non-cash transaction methods among microfinance beneficiaries even in the rural areas. This has definitely accelerated adoption rates both at NBFC-MFI and client ends.”

    “While many NBFC-MFIs already do significant share of transactions through cashless modes, many other institutions have initiated pilots to analyse the best suitable methods for them. As the microfinance industry moves towards digitisation, we believe it will lead to achievement of financial inclusion in the true sense through providing seamless and quicker processing of credit to clients along with increasing cost benefits for NBFC-MFIs in the longer term. It can create an enabling platform to diversify product offering, target new customer segments and even modify the operating model,” she said.

    The report states that while 88% of the total cashless disbursements were made through NEFT/IMPS by NBFC-MFIs in 2016-17, cheques (50%) and ECS (33%) were the preferred modes of repayments by microfinance clients. Other transaction methods that were used by both NBFC-MFIs and clients included, Aadhar enabled payments, mobile wallet and pre-paid cards. According to the report, usage of Aadhar Payment Bridge System (APBS) for disbursements has been quite low (4%) in 2016-17 but it may prove to be suitable for MFIs in the long run with its low transaction cost and faster roll out benefits. Similarly, Aadhar Enabled Payment Systems (AEPS) and UPI may provide quicker, safe and secure transactions to customers for repayments along with easier adoption.

    While the adoption rate of cashless transactions is increasing, infrastructure and connectivity problems still adversely affect the growth - the report noted. Another major challenge is that for a typical MFI client both income and expenditure avenues are through cash. Therefore, lack of value proposition of ‘non-cash’ transactions coupled with the low levels of usage of bank accounts, creates hassle for customers to adopt or prefer cash-lite transactions. Higher cost of technology also affects operating costs.

    As per the report, there is a low level of understanding among the MFI clients and lack of adequate handholding leads to lower adoption of cash-lite transactions. To enable greater acceptance of cash-lite models at the customers’ end, there is a need to bring in behavioural change towards the usage of bank accounts.

    The report notes that adoption of Cash-lite model is not only about operational efficiency and risk mitigation, but it can also create an enabling platform to diversify product offering, target new customer segments and even modify the operating model.

    - by TradeBriefs Bureau

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