Microfinance Instability Guaranteed?
The microfinance industry, a pillar of financial inclusion in India, has been under stress this past year – see latest data from MFIN and views from industry as business declined for three consecutive quarters. Tamal Bandyopadhyay calls the microfinance sector a phoenix that bounces back after every crisis. And yet, the fact that there are repeated crises points to fundamental issues that continue to plague this sector – essentially this shows up as aggressive loan disbursement by a few MFIs, over-leveraged borrowers, growing delinquencies and reports by customers of harassment for repayment that attract regulatory action and the sector is hit. While the order against a few MFIs in October last year was reversed by the RBI last month towards better compliance and lower interest rates, tight supervision continues, and specific cases attract penalties. This week the RBI reviewed the risk weights for microfinance loans and this reset to the pre-November levels sends a signal that the RBI believes that potential risk to unsecured loans has subsided, enabling renewed flow of funds to the sector.
However, there is still uncertainty since, apart from RBI action, a challenge has also come from an ordinance from the Karnataka State Government. Gopika Gopakumar notes that even though it is clear that all regulated entities are out of the scope of the ordinance, there are concerns that in the short-term collections will be affected, as local authorities may misinterpret the ordinance to include all entities. The fact is that the microfinance industry is subject to regulatory and operational pressures from different sources, and there is a pressing need for coordinated, transparent action across multiple authorities and stakeholders towards stable growth.
For all the regulatory action, the fundamental issues remain – how to screen customers effectively to prevent over-indebtedness, how to prevent unregulated entities from rocking the entire sector, how to ensure ethical practices in the industry etc. Dvara Research has a comprehensive paper out giving recommendations for the regulator to implement in the short term and the medium term. Jiji Mammen has made a few recommendations to reform the sector, including a standardized household income assessment model which Sa-Dhan is working on, mandating a common identifier like Aadhaar for KYC verification, amending credit bureau rules for weekly updating and expanding beyond the current RBI-regulated entities etc. For all the reforms and suggestions, however, the fact remains that the pressure to show results for investors will make long term stability in this sector a challenge.
The regulator has its hands full indeed. Given the challenging times, RBI Governor Sanjay Malhotra gave an assurance for a consultative approach to regulation and working with stakeholders towards smooth implementation of major decisions in a bid to remove uncertainty and raise confidence. However, even as old issues need managing - read Dinesh Unnikrishnan on the chronic governance failures plaguing India's co-operative banking sector - fresh risks spring up with new products and models- read Archishma Iyer on the emerging risks in the unregulated digital-gold leasing offering.
Finally, there is still so much to be done on the basics of delivering financial inclusion, as RBI Deputy Governor M. Rajeshwar Rao noted in a recent speech. He pointed to the Financial Inclusion Index moving steadily upwards since its inception four years ago and flagged the Usage sub-index lagging the other two - Access and Quality as of March 2023. But we see that the RBI is yet to release data on the sub-indices for March 2024, and from Indicus, we take this opportunity to repeat our ask for transparency on the index parameters and sub-index movements.
This month we highlight financial inclusion for women through two pieces: a) A note by Aditi Surie, Antara Rai Chowdhury and Sona Mewati of IIHS, in collaboration with the GxD hub (IFMR) that examines the role of institutional, community, and household mediators in shaping women’s digital journeys, exploring trust, access, and usage patterns across key platforms like WhatsApp, YouTube, and UPI, and b)Mary Ellen Iskenderian, Women's World Banking answers questions on why financial inclusion for women matters, explaining the profound impact that ensuring women’s independent access to finance has on human development.
Do read more news and views in our curated list below. Please also follow our Indicus Centre for Financial Inclusion page on Linkedin to continue the conversation.
Payal Malik and Harishankar Jagadeesh, ICRIER, write on UPI, the principles of data governance, and the true cost of the duopoly in the market.
Misha Sharma, Dvara Research, looks at the theory of impact of mobile instant credit.
RBIH and MicroSave brought out a report unpacking how women use smartphones—from communication to financial transactions—and what it takes to make DFS more accessible, intuitive, and relevant. The report was co-authored by Pramiti Lonkar, Disha Bhavnani, Kritika Shukla and Aarcha PB.
Neelanjit Das, Economic Times, explains the revision by NPCI in the rules of disputed UPI transactions, which will improve the experience for customers.
Joep Roest CGAP writes on using social protection with financial inclusion to build climate resilience for vulnerable segments.
Tamal Bandyopadhyay looks at the implications of the impending one state, one RRB (regional rural bank) plan.
Anit Mukherjee and Ashwini Joshi, Observer Research Foundation, write a background paper on Digital Public Infrastructure as a Catalyst for Private Sector Innovation
Ajinkya Kawale, Business Standard, reports on the RBI tightening vigil on P2P lending after revising rules.
Infomerics Ratings reports on India’s microfinance sector.
Shams Tabrej, Ezeepay, looks at the case for fintech industry’s self-regulation.
Raghu Mohan, Business Standard, talks to Anand Kumar Bajaj, PayNearby on reinventing the business correspondent model and to Ritesh Srivastava FREED on the rising stress in retail credit, and the need for financial literacy and consumer awareness forums.
Karina Broens Nielsen and Peter Zetterli, CGAP, explain current evidence on how financial services—credit, savings, insurance, and payments—can advance climate action and other development outcomes.