HESP August 1, 2018

Overview of Microfinance in India

Born out of the need to provide access to savings and credit services, Microfinance in India started in 1970s through the emergence of informal self-help groups. Post-1991, Indian Microfinance posted strong growth numbers due to the liberalization of the economy and increased lending by private sector organizations. Due to strong demand for loans from borrowers otherwise neglected by the banking system, coupled with investors looking to invest funds in a high growth industry, the microfinance sector grew consistently between 2005-2010. However, in 2010, the Andhra Pradesh crisis and the State Government’s ordinance to restrict the activities of microfinance companies slowed the growth of the industry. The crisis triggered a series of regulatory changes by the RBI in the following years. Since then, the microfinance sector has evolved into a more mature market.

 

Highlights of the recent trends in the industry

MFIs have begun extending larger loans to their clients. Initially, MFIs usually provided small-amount, income generating loans to their customers. As customers mature over multiple loan cycles, focus shifts to larger loans that are focused on consumption. During the past two years, there has been a 58% jump in average loan size per customer from 10,364 rupees in 2014 to 16,394 rupees in 2016. Industry experts attribute the high growth in numbers to the bigger client base, rise in general income levels, and ease of lending rules by RBI.

Source: MFIN Micrometer, May 2016

Since its inception, Indian Microfinance has been considered largely as a rural-focused sector. This is in stark contrast from the Microfinance sector in South America. However, over the years, MFIs have shifted their focus from rural areas to urban areas. A majority of MFIs have shifted to an urban centric business model to cut down operating costs and maximize operational efficiency. As an alternative option, many banks now lend to small borrowers through MFIs to meet their priority sector lending targets. The rise in the number of urban clients of MFIs highlights the reluctance of many banks to lend to smaller borrowers. Despite strong banking infrastructure in urban areas, demand for microfinance loans from the unorganized sector remains high.

Source: Bharat Microfinance Report, 2015

 

Recommendations:

  1. Need to develop credit information on microfinance borrowers –

High Mark Credit Information Services, which started in 2010, was India’s first Credit Bureau (CB) for MFIs. It was established to address the lack of information regarding prospective borrowers. Over the years, MFI industry has been making good use of credit bureaus to check delinquent borrowers, restrict lending, and comply with regulatory guidelines. However, as the demand for microloans increases, there needs to be a proportionate increase in the number of CBs to support the demand. This is especially true for rural borrowers, since it is difficult for small lenders to establish their credit history and determine their repayment capability.

 

Snapshot of services offered by some of the credit bureaus of India:

 

Source: https://www.bankbazaar.com/equifax/equifax-cibil-experian-highmark.html

 

  1. Need to develop crowdfunding platforms dedicated specifically to micro lending

In the past few years, Crowdfunding has emerged strongly in India as a form of alternative lending. Through there are few crowdfunding platforms especially dedicated to micro lending, Crowdfunding has largely overlooked the micro-loan market. India needs to develop more Crowdfunding platforms that provide wider access to capital across the nation. Public Private Partnerships (PPPs) in this area could play a transformative role and could enable access to capital for the larger population. The success story of Range De as a micro lending crowdsourcing platform should serve as an encouragement for other players to enter the industry. The more players that focus on micro-lending, the quicker will be the process of poverty alleviation.

 

  1. Need to develop cashless mobile banking platforms

Earlier, MFIs emphasized on achieving high repayment rates. This process required a lot of manpower in the field and the process was slow and inefficient. However, technology is transforming the industry by helping to reduce costs and increase outreach. In the light of recent demonetization in India, there is an increasing need to develop cashless payments systems in rural India. India has more than 1 billion mobile subscribers and this base could be capitalized to gain strong foothold in rural markets. Paytm has been a great success in urban India and a similar model can be adapted for rural India.

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