In 2006, when I started my Bihar experiment extending collateral-free loans to low-income groups in remote areas, I was a subject of ridicule. Everyone in my family and among friends was skeptical about the recovery of the money and somewhat certain that the entire corpus would turn into bad debt. But I stayed the course undeterred and opened the first branch at Hajipur in Vaishali district, disbursing collateral-free loans to women.
A few months on, the husband of a borrower named Shanti (name changed), was implicated in a criminal case and he absconded. The entire family went underground. When our field officer went for weekly collection at the centre meeting and could not trace Shanti, he asked other members of the group to pay for her. They contributed to the repayment amount but were concerned. Late evening that day, there was a knock on the door and to our surprise, Shanti turned up to repay her due. She informed us that the next three instalments 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. The fact that the erstwhile banking solutions couldn’t reach them at their doorstep cannot be denied, neither can the fact that banks have limitations. This vacuum is being filled by microfinance institutions.
Before December 2011, microfinance was driven mostly by NGOs and new and smaller non-bank finance companies (NBFCs). As the idea took root and attracted private debt and equity, challenges like high indebtedness, multiple lending and high-interest rates started surfacing. These challenges spiraled into a crisis in October 2010 with the Andhra Pradesh government passing an ordinance to control private microfinance activities following news of some women borrowers having committed suicide due to non-payment. Allegations were also raised against the microfinance industry for using unfair means to get the 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, RBI introduced strict lending norms by capping the lending rate at 26 per cent and margins at 10-12 per cent. It also limited the amount that could be given to a single borrower and even defined the borrower. These strict rules were gradually eased to make lending easier.
As on December 2021, the general loan portfolio of microfinance was Rs 2,56,058 crore with 105.8 million loan accounts. According to Microfinance Institutions Network (MFIN), in terms of geographic spread, NBFC-MFIs have 78 per cent of the portfolio is rural India and 22 per cent is urban parts of the country. If this is supplemented by Nabard’s Status of Microfinance in India report 2020-21, the sector has touched over 130 million households in India, which is roughly just one-third of Indian households.
There is still a huge market to capture and the December 2011 rules were becoming “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, digitisation, start-up culture, new players and rural India’s enthusiasm and acceptance for microfinance.
The concept of three-day customer training is now replaced with product introduction and description, which is completed in hours. The emotional bonding and training of customers is getting replaced with credit score and creditworthiness. This is in a big part being driven by the customer. For microfinance players, adapting to the new landscape needed additional support.
The RBI’s new set of guidelines, published on March 14, 2022, aims to provide this support. The new rules define microfinance loans as ‘collateral-free’ loans to a household comprising husband, wife and unmarried children and with a yearly 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 on a common platform, which would augment growth for the industry.
The regulator has given the microfinance sector a gamut of opportunities. The microfinance landscape is changing at a rapid pace. It’s possible that in the coming years, the group model will be replaced by individual lending; the RBI rules acknowledge that. The RBI guidelines, in a way, reflect the macro picture of the sector.
The new rules have flattened the rural-urban divide. Microloans were earlier meant for income generation alone, but there will be a wider ambit now. One can now borrow microloans for personal needs like building a house, buying a two-wheeler, meeting health expenses or addressing the cost of education. Therefore, the new trends in the industry can be individual lending, small-ticket and short-tenure loans and completely digital operations from submission of loans to disbursement and repayment.
The target clients are also evolving with the wave of digital disruption reaching the remotest corners of the country. The women in rural India are gradually adapting to the changing dynamics.
There will be challenges too, but eventually we will see a significant reduction in the operating expenses in the long term with more data on household composition and incomes, use of data analytics and manual processes being replaced with technology. The Indian microfinance market is expected to grow at a brisk compounded annual growth rate (CAGR) of more than 40 per cent through 2025, predominantly on account of the increasing demand for microfinance loans from the MSME sector.
There are a few aspects that are essential to the domain. Microfinance is a big enabler for rural employment. According to the National Council of Applied Economic Research (NCAER), the sector, including the bank-promoted self-help groups, generated 13 million jobs in 2018-19. It has also emerged as a big support for Atmanirbhar Bharat and women empowerment.
Women customers are the backbone of the microfinance industry, and the credit for the sector’s phenomenal growth goes to them. Their habit of saving, prudent spending, and timely repayment to be eligible for the next loan is commendable. By the next decade, India will have 75 million women in the workforce. Today, we have only about 27 per cent, women in the workforce and as we take it to the global average of 48 per cent, according to a World Economic Forum study, we will add over $700 billion to the economy. So, that is just a glimpse of our clientele.
The author is co-founder and CEO of Light Microfinance. Views expressed are personal.
Disclaimer: Views expressed are the authors’ own, and Outlook Money does not necessarily subscribe to them. Outlook Money shall not be responsible for any damage caused to any person/organisation directly or indirectly.
