Small borrower, big problem

Demonetisation has hit the microfinance sector hard, pushing the poor out of financial inclusion and towards usurious debt.

Written by Saibal Paul | Published:December 23, 2016 12:00 am
demonetisation, demonetisation problem, microfinance sector, micro saving, bharat microfinance report 2016, Jan Dhan Yojana, MFI, MUDRA loan, RBI, reserve bank of india, debt, financial debt, indian express news, india news, indian express opinion, opinion The microfinance sector constitutes NBFCMFIs, societies, trusts, cooperatives and other entities. (Illustration by Subrata Dhar)

Microfinance is a set of financial products including micro-savings, credit, remittances, pensions, etc, crafted for the poor and serviced with affordable costs. As per the Bharat Microfinance Report 2016, microfinance institutions (MFIs) are now reaching 40 million clients with 70,000 crore rupees of portfolios; additionally, 60 million clients are being reached by SHGs (self-help groups) for credit. This sector consumes about 46,000 crore rupees of MUDRA. The microfinance sector constitutes NBFCMFIs, societies, trusts, cooperatives and other entities.

But the significance of microfinance is the type of clients being served, over and above the quantum of the portfolio. About 60 per cent of Indian adults did not have access to formal financial institutions. The account opening drive through the Prime Minister’s Jan Dhan Yojana was a welcome initiative; however, most of these accounts were dormant. As fieldwork shows, little has happened in the formal financial sector to actually reach the poor. In this situation, the microfinance sector has seen a growth of upto 60 per cent per annum. But microfinance loans are collateral-free and unsecured in nature, presenting huge potential risks for MFIs. Customers served by MFIs are essentially very poor and usually ostracised by the traditional banking system. Yet, apart from RBI-permissible micro loans per client upto Rs 1 lakh from two sources, MFIs also provision microinsurance and other financial instruments to such customers.

In most cases, MFIs are the only source for credit and financial instruments for the poorest families trying to manage financial needs and unseen instabilities. The predominant microfinance model is a joint liability group, where members of women’s affinity groups take loans from microfinance institutions (MFIs) with shared liabilities for repayment; MFIs source these loans from lending agencies, mostly banks, both public and private. So, the term loans provided by the banks are distributed amongst the clients and the repayment of the clients is repaid to the lenders within an agreed schedule. On the basis of different parameters, including timely repayments, the MFIs get subsequent term loans. Hence, the repayment of term loans to the banks is instrumental in order to ensure the inflow of credit to the clients.

Currently, demonetisation has been having a significantly negative impact on the microfinance sector and its clients; the poorer segments of the population are the worst hit. For security purposes, most of the loan transfers, from MFIs to clients, happen through the national electronic funds transfer (NEFT). However, repayment from them is by liquid currency. This is primarily because the poor use cash and do not use technology for daily chores. Even if they wanted to, the overarching architecture for a cashless economy is yet to be put in place and these people need to be educated to use it.

In a post-demonetisation scenario, despite being the source of lending term loans to MFIs, the banks are refusing to take discontinued currencies. Due to the sudden shift, clients are unable to exchange the discontinued currencies — which they had saved for repayment.

MFIs are unable to accept discontinued currencies as the banks are refusing to accept these. The situation is very gloomy. Repayment has cascaded down to 30 per cent and in some places, it is reported to be as low as 20 per cent.

The regular portfolio at risk of the microfinance sector is less than half a per cent; this is much lower than the banking industry. As discussed, timely repayment propels the subsequent leg of term loans to MFIs; non-repayment presumably blocks the process and eventually, this will translate to unavailability of financial support for these clients. In the past, it has been seen that once the MFI source is dried up, the clients take refuge with loan sharks.

In order to manage the situation, the Reserve Bank of India has notified all regulated entities on new prudential norms on income recognition, asset classification and provisioning pertaining to advances for the banks. It is to give small borrowers some more leeway to repay their loan dues because of the challenging time that is emanating from the withdrawal of the legal tender status of the old 500 and 1,000 notes.

But the situation is getting even more complex with these new prudential norms as the political class is trying to take advantage of the situation in certain places. In some districts of Maharashtra, Uttar Pradesh and Madhya Pradesh, local political leaders, in search of some instant, cheap publicity, have been cajoling clients by interpreting this notification as a waiver. Political leaders, using their local heft, affiliations and the ignorance of poor people, are in fact spoiling the sector. They are conducting rallies and demonstrations and igniting clients and their families not to repay loans and even, to chase out field workers of the MFIs. In certain areas, repayment has almost stopped.

The microfinance sector is going through substantial challenges. The RBI, in order to protect the market and clients, has propagated strict regulation which covers significant portions of the sector. However, as experienced till now, demonetisation has posed challenges to both clients and the entire sector. It is affecting the credit culture of poor people, who are undergoing stress and falling prey to unscrupulous political leaders, who try to make them ignore repayment, and thereby face greater financial stress.

This entire act will again push the poor out of financial inclusion. Secondly, substantial non-repayment will hinder the flow of term loans from the lenders and gradually, the sector will dry up. The efficient channel for MUDRA loans will also get diluted. Deep-pocket big MFIs can manage for some time; however, the small MFIs will soon face real trouble. The credit need is inevitable especially for the economically deprived. But if MFIs are not in the position to cater to them, such clients will have to seek refuge with loan sharks, which will make them even poorer and unable to emerge from such binding poverty. A life of dignity and real aspirations could forever be wiped off their horizons.

The writer is associate director, Sa-Dhan, The Association of Community Development Finance Institutions. Views are personal

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  1. S
    Satendra kumar
    Dec 23, 2016 at 2:53 am
    Demonetisation the new currency and the new method of payment the central government is implementing by digitising with debit and credit cards gift vouchers smart cards all transaction done by digital system should be available to all individual.Poor or Rich it does not matter.One INDIA ONE SYSTEM OF PAYMENTS.
    Reply
    1. A
      Anand Krishnan
      Dec 23, 2016 at 8:17 am
      For security purposes, most of the loan transfers, from MFIs to clients, happen through the national electronic funds transfer (NEFT). Who are the clients here ?
      Reply
      1. B
        Balaji
        Dec 23, 2016 at 7:59 am
        There is a misunderstanding. Digital transaction is not forced on the people. It is an option and a suggestion. If you are in a position to make digital transaction Then you do that otherwise you do as you convenient. It is the imagination only that people thinking cash transaction is fully stopped and digital transaction is only operational and start expressing the view regarding the difficulties. You just see if you buy a air ticket then which is the convenient way for you? transaction thru cash or thru card. If you are a poor then it is not a compulsion to make digital transaction. You can make as you convenient. Once again I am in a view that it is the change in currency note, not the reduction of your property if it is not unaccounted money. People are terming the move as "pocket Maar". How it will be pocket maar. Who is taking money from your pocket. If it is your white money then it will be always your money only.
        Reply
        1. M
          mark
          Dec 23, 2016 at 2:52 pm
          English did what they did. And now BJP did the rest.
          Reply
          1. M
            mark
            Dec 23, 2016 at 2:51 pm
            First thing first. Why did congress win and BJP loose for these 55 years? Are you suggesting Indians are fools and they can not vote with clear mind?
            Reply
            1. M
              mark
              Dec 23, 2016 at 2:41 pm
              What is the misunderstanding? The entire demonitisation initiative, as the current spin goes owing again to the fact that no significant black money was found, was to force Indians go digital.lt;br/gt;lt;br/gt;Watch speech of Modi, hear what jaitley has to say.
              Reply
              1. M
                mark
                Dec 23, 2016 at 2:49 pm
                if you have such a problem with IE, go read Tarun Bharat or Dainik Sanatan Prabhat
                Reply
                1. M
                  mark
                  Dec 23, 2016 at 2:47 pm
                  yes thats correct. Just as demonetisation has boosted prospects of Indias biggest psychopath.
                  Reply
                  1. J
                    J G
                    Dec 22, 2016 at 11:54 pm
                    The country is being lead to capitalism without any understanding of the comlexities of economic management of aq complex community as India is
                    Reply
                    1. k
                      k. viswaz
                      Dec 23, 2016 at 11:23 am
                      Isn't it true ?lt;br/gt;Must read and debate :lt;br/gt;lt;br/gt;A1...Q : What's wrong with Cashless Transaction. lt;br/gt;lt;br/gt;Quote * Sir think that a 100 rupee note is circulated 1,00,000 times it will have the same value no body get any commission.but if it is circulated through cashless way each transaction fetches 2.5% commission that means 1,00,000 times 2.5% = 2500% i.e. Rs. 2,50,000 (Rs. Two Lakhs fifty thousand Rupees) to service providers like Paytm or Jio Money etc. Just for hundred rupees. So, it's a perpetual golden egg laying goose gifted to the gang. lt;br/gt;That's why this is the Mother of All Scams"*lt;br/gt;🇮🇳🙏???
                      Reply
                      1. M
                        Mahender Goriganti
                        Dec 23, 2016 at 12:34 am
                        Not true if any, it will pave the way for transparent lending. Simply illogical explanation to say the least.
                        Reply
                        1. C
                          Chandru
                          Dec 23, 2016 at 5:58 am
                          very vague articlelt;br/gt;No hard data-eg: how many in a village in UP,TN etclt;br/gt;% collections in Nov and Dec.?lt;br/gt;In which states local politicians ask people to renegade MFI loans? Names/areas.lt;br/gt;i expect a very honest and detailed answers from a Director of Sa-Dhan!lt;br/gt;not an article from an arm chair journalist
                          Reply
                          1. N
                            Nisha Dev
                            Dec 23, 2016 at 3:29 am
                            Demonetization has pushed the marginal farmer and the landless labourers to borrow from the unscrupulous influential local moneylenders which will push them into greater insecurity, poverty and financial stress in the long run. This will lead to more suicides as more and mores farmers will lose control of their lands and will become bonded labourers to these local mafias which include petty officials of the Grama Panchayats and members of various elected bodies.
                            Reply
                            1. N
                              Nisha Dev
                              Dec 23, 2016 at 3:30 am
                              Demonetization has pushed the marginal farmer and the landless labourers to borrow from the unscrupulous influential local moneylenders which will push them into greater insecurity, poverty and financial stress in the long run. This will lead to more suicides as more and mores farmers will lose control of their lands and will become bonded labourers to these local mafias which include petty officials of the Grama Panchayats and members of various elected bodies.
                              Reply
                              1. N
                                norbert
                                Dec 23, 2016 at 2:28 pm
                                Something I never realized before. Thanks to you we are now better educated on one more disadvantage of going cashless.
                                Reply
                                1. N
                                  norbert
                                  Dec 23, 2016 at 2:32 pm
                                  When you suck out 86% of cash you are creating a cash-shortage of gigantic proportions and forcing everyone to go cashless. So you are not really giving the common chaiwala (not "the chaiwala" - Modi) an option.
                                  Reply
                                  1. P
                                    Parth Garg
                                    Dec 23, 2016 at 8:20 am
                                    Demonetisation has proved a national disaster not only for the micro finance but for the 125 crore Indians who have been rendered beggars of their own hard earned money.
                                    Reply
                                    1. P
                                      P.De Menezes
                                      Dec 23, 2016 at 5:04 pm
                                      Then why have this lottery and waste so much money........ that is called dangling the carrot my friend and the poor illiterate people will fall for this temptation..... how long will this lottery go on?
                                      Reply
                                      1. P
                                        Prasanna kumar
                                        Dec 23, 2016 at 4:29 am
                                        This is complete rubbish . I work a MFI intermediary financing NBFC. Our internal field record shows. 80-90% collection across the country. Southern states have already come back to their normal range. While MH (Vidharbh), UP (western) and MP (indore and surrounding) are facing problem, UPandMP is more of communal and less of others. Lots of disconnect with the ground in the article.
                                        Reply
                                        1. R
                                          Raghav
                                          Dec 23, 2016 at 8:54 pm
                                          This copy paste does not take into consideration that for Rs 100 payment most time you pay Rs 2.5 as tax which never makes to govt. Means 1,00,000 payment by that Rs 100 = Rs 2,50,000 tax not paid to govt. There is no way to track cash transaction hence no way to collect tax on cash payments. The copy-paste logic totally fails with Rupay and Unified Payments Interface (UPI). The nation will weed out non-tax paying corrupt businesses.
                                          Reply
                                          1. R
                                            Raku
                                            Dec 25, 2016 at 4:46 pm
                                            Demonetisation will destroy this country for ever. It is worse than drain theory in the 18th century. Modi ne barbaad kar diya sabko.
                                            Reply
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