Introduction: Microfinance institutions for decades have positively impacted financial inclusion, savings and lending, especially in semi-urban and rural locations. The last five years have seen a massive push from the government to improve financial inclusion on all three pillars of financial access – credit, savings and insurance. The years 2015 through 2018 have seen improvement in financial inclusion across various fronts.
The above developments augur well for the microfinance sector in the form of new growth avenues. With a relatively lower interest rate regime, Microfinance portfolio has grown CAGR of ~30% in the last 3 years across NBFC-MFIs, SFBs and Banks. While SFBs enjoy less regulatory restrictions than NBFC-MFIs; they are adapting to the increased compliance. As MFIs seek to continue on the growth path, the MFIs are evaluating geographical expansion, product portfolio expansion opportunity to cross sell, upsell non–lending products, investment in technology, strategic alliances with Fintech players etc. The sector is also witnessing consolidation in the form of mergers of involving some of the larger Microfinance lenders. The success of these strategic initiatives will depend on regulatory environment, technology based ecosystem development and management of credit and operational risks.
Any slowdown or perceived slowdown in the Indian economy, or in specific sectors of the Indian economy adversely affects the Microfinance industry. Overleveraging of borrowers by MFIs and SFBs is seen to be prevalent across states and is likely to affect asset quality. Over the last decade, events including and not limited to political and regulatory changes, social disturbances, religious or communal tensions, natural calamities, and various other factors have adversely affected the operations and performance of Microfinance lenders. The sector has time and again demonstrated that the ability to tackle these event risks and resume on the growth path. However, there is a need for the Microfinance lenders to arrive at a model by which they will be able to minimize the impact of these events on their ability to continue serving the financially underserved.
Role of data and technology in driving growth – Opportunities and Challenges Across financial services sector, we are seeing increased adoption of digital technologies and the use of data to improve efficiencies and provide better customer service and the microfinance players are no exception. The success of the model, MFI industry or institution per se has always been around customer centricity. While most MFIs have adopted cashless disbursements, they are continuously exploring opportunities to leverage technology through every stage of the lending value chain. A few players have started experimenting with digital methods for customer onboarding such as a mobile application to avail instant loans while others have initiated digital collection processes and have gained traction with as much as one-third of their collections conducted through cashless mode. While implementation of core banking systems and loan management systems are underway at many MFIs, there is a need to digitize across the value chain focusing on customer onboarding, underwriting, collections and governance mechanisms. Digital is emerging as a key enabler in microfinance and may see adoption by other players in the near future.
Traditionally a high-touch model, microfinance players may be faced with the task of educating the consumers about digital methods when embarking on the digital journey. The focus of technology strategy continues to be increasing operating efficiency, cost reduction, arranging wide cross-sell, and data analytics with clear goals. Technology will play a pivotal role in delivering a profitable and scalable model as increase in competition and rise in borrowing costs will add pressure to the margins going forward.
Microfinance – Balancing the social and commercial roles in the current landscape True to its nature of doing well by doing good, players in the microfinance industry have always strived to make a difference in the lives of their customers and yet run a sustainable business. Faced with challenges of reducing interest rates in the market, microfinance industry has seen introduction of various process improvement measures. Use of technology coupled with customer education has led to lower delinquency and higher profitability, while also educating the customer about responsible use of funds. Some players have started diversifying into other avenues like micro-insurance by leveraging the captive customer base.
As the competition intensifies, there has been a trend in the sector towards winning over the customers by participating in their social upliftment. Some microfinance institutions have started lending for non-income generating activities like construction of toilets, solar lighting and education purposes. With the bottom of the pyramid abound with multiple social challenges, microfinance industry is poised to capture this market and make a positive impact in the socio-economic status of the poor.
Role of SROs and Regulators in the current landscape The microfinance sector has been buzzing with a lot of activity over the last few years. Besides NBFC MFIs, the industry has attracted interest from a number of players like banks, small finance banks, fin-tech players and NBFCs, leading to improved access for the customer. SFBs, Banks and other NBFCs entering the borrower profile currently targeted through MFIs and who are no longer New to credit customers is likely to change the market dynamics related to pricing, product offerings, level of exposures, borrower indebtedness and credit quality. This period of dynamic change might be an opportune time for the regulators to re-evaluate certain rules such as the lending cap on NBFC MFIs.
SROs have also played an active role in the evolution of microfinance sector by encouraging players to adopt a common code in order to prevent over-indebtedness and adopt fair practices. The microfinance sector has weathered many a crisis, thanks to timely intervention by the regulators who have instilled prudence and provided an enabling regulatory environment. In the current scenario, the industry looks up to the regulators and SROs for an evolved regulatory guidance – one that offers a level-playing field across the types of microfinance lenders, encompassing lending caps and household indebtedness – a measure that can ensure all risks are managed pro-actively.
Beyond Lending The next frontier in microfinance is to explore avenues beyond credit and achieve financial inclusion in a holistic manner. As indicated by several studies, the impact on the poor is higher if other services are made available beyond micro-credit. Micro-insurance is emerging as a promising new avenue and as of 2018, 20 MFIs have provided health insurance products to over 9 lakh customers while over 51 lakh customers have been provided with non-health products by 33 MFIs. As the competitive intensity for MFIs increase, the pressure on margins will increase considerably. So, the need for the MFIs to focus on non-interest income/ credit plus products becomes very important. MFIs can enhance the penetration of insurance in General and Life insurance sector with simple, contextual and small ticket size products, based on the needs of the segment.
Several other activities can be considered under the credit-plus umbrella. The MFIs can help improve social impact through distribution of products such as solar lamps, LED bulbs and lights, sanitation products, purifiers, etc. There is empirical evidence that water and sanitation loans have 0% NPA since this is viewed by the borrower as an uplifting gesture and is treated with gratitude. With non-income-generating loans forming 7% of overall loans, there is still some room to grow this segment. Financial literacy programs, development programs for micro-entrepreneurs and preventative health awareness programs are some of the other avenues that could be explored. Such programs build brand loyalty, help in customer acquisition in the long run and are a win-win for all stakeholders in the inclusive finance ecosystem.
