Role of microfinance in the economy

Role of microfinance in the economy

Microfinance, involving extension of small loans and other financial services to low income groups, is a very important economic conduit designed to facilitate financial inclusion and assist the poor to work their way out of poverty. It is argued that microfinance can facilitate the achievement of national policies that target poverty reduction, empowerment of women, assisting vulnerable groups, and improving standards of living.

The journey of financial inclusion in the past two decades has been one of intensive efforts and incremental experimentation. However, the quantum jump came when Pradhan Mantri Jan Dhan Yojana (PMJDY) was launched in 2014, which enabled achievement of the objective of providing bank accounts to adult population in almost every household. The reach of mobile phones and e-KYC has ensured these accounts are accessible to those who have been included in the financial services milieu.

 The Reserve Bank of India has been making sustained efforts to increase the penetration of formal financial services in unbanked areas, while continuing with its policy of ensuring adequate flow of credit to productive sectors of the economy and also ensuring the availability of banking services to all sections of people in the country.

Till two decades ago, on the supply side, the absence of technology and infrastructure was a major impediment as it restricted expansion of banking services to far-flung areas of the country comprising over 600 thousand villages. The institutionalization of the framework of Business Correspondents (BCs) has been a major step towards enhancing access to banking services. The RBI advocated a combination of ‘Brick and Mortar’ structure with technology for extending financial inclusion in the geographically dispersed areas. With all these measures, the number of banking outlets in villages has gone up significantly.

The new banking entities (i.e. two new universal banks and ten small finance banks) have also helped to further the cause of financial inclusion in the country. Considering the strong linkage between financial inclusion and payment systems, RBI has also taken several steps including encouraging use of mobile banking, pre-paid instruments such as digital and mobile wallets, etc. For more than a decade now, banks have worked hard to sustain the momentum for achieving the objective of financial inclusion.

Financial inclusion is becoming a focus area for banks, NBFCs, Financial Technology (FinTechs) and other financial entities. Small Finance Banks have also been set up to further financial inclusion with a client base comprising mainly of migrant labour workforce, low income households, small businesses and other unorganised sector entities. Today, when it comes to financial inclusion and microfinance, there are several channels such as universal banks, small finance banks, micro finance institutions, BCs, etc. Therefore, as a country that is determined to achieve universal financial inclusion at affordable cost, this is a defining moment, and we should seize the opportunity.

 Several innovative measures have been undertaken by the RBI to facilitate the creation of a conducive environment and increase the level of penetration of the banking system to serve the unserved and underserved population for achieving the objective of sustainable and inclusive economic growth. A co-origination model, which enables the scheduled commercial banks (excluding Regional Rural Banks and Small Finance Banks) to co-originate loans with the non-deposit taking systemically important NBFCs has also been rolled out for credit delivery to the priority sector. This is expected to boost lending to micro enterprises, small and marginal farmers, Self Help Groups (SHGs), etc.

In order to boost credit to the needy segment of borrowers, the Reserve Bank has also advised all Scheduled Commercial Banks (excluding Regional Rural Banks and Small Finance Banks) that bank credit to registered NBFCs (other than MFIs) for on-lending will be eligible for classification as priority sector under respective categories subject to certain conditions..

 The Micro, Small and Medium Enterprises form a vital component of the economy in terms of their contribution to employment generation, innovation, exports, and inclusive growth. In view of this, the Reserve Bank had constituted an ‘Expert Committee on Micro, Small and Medium Enterprises’ (Chairman: Shri U. K. Sinha) to identify causes and propose long-term solutions for the economic and financial sustainability of the MSME sector. The Committee has made various recommendations in areas such as legislative and institutional framework, access to finance, capacity building and new technological interventions for lending to MSME sector. The recommendations are being examined for implementation.

 Since 2006, the RBI has adopted a planned and structured approach to address the issues of financial inclusion by focusing both the supply and demand side. Having spoken about the supply side, let me now discuss the equally important, but less focussed, demand side aspects of financial inclusion. With the growing formalisation of financial services, we must now intensify our efforts on the demand side, which is to focus on enhancing capabilities so that individuals in the low income groups are in a position to not merely avail the offered services, but are also capable of demanding preferred products and services suitable to their needs / choices.

The MUDRA is a case in point. While such a massive push would have lifted many beneficiaries out of poverty, there has been some concern at the growing level of non-performing assets among these borrowers. Banks need to focus on repayment capacity at the appraisal stage and monitor the loans through their life cycle much more closely.

The role and importance of the microfinance sector in our economy has also been steadily growing. According to The Bharat Microfinance Report 2019 prepared by Sa-Dhan, MFIs operate in 29 States, 5 Union Territories and 570 districts in India. The MFIs are also expanding into newer territories for reducing their concentration risk.

 Tailored products for providing credit to those without a credit score, entrepreneurial and consumption credit, handholding, financial literacy, social occasion credits and insurance (life and non-life), are all waiting to be tapped in scale and size. Limited forays have been made but are yet to achieve their full potential.

The RBI defines Financial Inclusion as the “process of ensuring access to appropriate financial products and services needed by all sections of the society in general and vulnerable groups such as weaker sections and low income groups in particular, at an affordable cost in a fair and transparent manner by regulated, mainstream institutional players”. The National Strategy for Financial Inclusion (NSFI) 2019-24 has been framed by us. It gives the Vision to make financial services available, accessible, and affordable to all citizens in a safe and transparent manner to support inclusive and resilient multi-stakeholder led growth